Interim Report 2015 Stock Code: 0008 CONTENTS
1 Corporate Profile
2 Key Figures
3 Statement from the Chairman
4 Statement from the Group Managing Director
6 Board of Directors
11 Management’s Discussion and Analysis
19 Consolidated Income Statement
20 Consolidated Statement of Comprehensive Income
21 Consolidated and Company Statements of Financial Position
23 Consolidated and Company Statements of Changes in Equity
25 Condensed Consolidated Statement of Cash Flows
26 Notes to the Unaudited Condensed Consolidated Interim Financial Information
47 General Information
56 Investor Relations CORPORATE PROFILE
PCCW Limited (PCCW or the Company) is a global company headquartered in Hong Kong which holds interests in telecommunications, media, IT solutions, property development and investment, and other businesses. The Company holds a majority interest in the HKT Trust and HKT Limited, Hong Kong’s premier telecommunications service provider. HKT meets the needs of the Hong Kong public and local and international businesses with a wide range of services including local telephony, local data and broadband, international telecommunications, mobile, and other telecommunications businesses such as customer premises equipment sale, outsourcing, consulting, and contact centers. PCCW also owns a fully integrated multimedia and entertainment group in Hong Kong, which includes a highly successful IPTV operation, now TV. As the provider of Hong Kong’s first quadruple-play experience, PCCW offers a range of innovative media content and services across four delivery platforms – fixed-line, broadband Internet access, TV and mobile. Also wholly-owned by the Group, PCCW Solutions is a leading information technology outsourcing and business process outsourcing provider in Hong Kong and mainland China. In addition, PCCW holds a majority interest in Pacific Century Premium Developments Limited, and overseas investments including the wholly-owned UK Broadband Limited. PCCW employs approximately 23,300 staff representing 50 nationalities. A majority of our employees are based in Hong Kong and mainland China, while we also maintain a presence in about 40 other countries around the globe. PCCW shares are listed on The Stock Exchange of Hong Kong Limited (SEHK: 0008) and traded in the form of American Depositary Receipts (ADRs) on the OTC Markets Group Inc. in the U.S. (Ticker: PCCWY).
PCCW interim report 2015 1 KEY FIGURES
FINANCIAL HIGHLIGHTS For the six months ended June 30, 2015 In HK$ million (except for per share data)
2014 2015 (Unaudited) (Unaudited)
Revenue Core revenue* 14,440 17,983 PCPD 224 99
14,664 18,082
Cost of sales (6,782) (8,027) General and administrative expenses (6,025) (7,298) Other gains, net 688 60 Interest income 45 35 Finance costs (573) (764) Share of results of associates (5) 19 Share of results of joint ventures 14 (6)
Profit before income tax 2,026 2,101 Income tax (385) (209)
Profit for the period 1,641 1,892
Attributable to: Equity holders of the Company 1,058 1,070 Non-controlling interests 583 822
Earnings per share (in HK cents) Basic 14.57 14.39 Diluted 14.55 14.36
Dividend per share (in HK cents) Interim dividend 6.99 7.96
EBITDA1 Core EBITDA* 4,457 5,784 PCPD (81) (101)
4,376 5,683
*Note: Please refer to page 11. Note 1: Please refer to page 13.
2 PCCW interim report 2015 STATEMENT FROM THE CHAIRMAN
I am pleased to report satisfactory financial results of the core HKT reported a set of solid results for the first half, driven by its businesses of PCCW for the six months ended June 30, 2015. robust fixed broadband business despite unrelenting market competition, the enlarged mobile business and synergies arising Providing viewers with a great variety of quality content, from the integration of the CSL business, as well as steady growth now TV recorded further gains in ARPU (average revenue per user) of the international connectivity business. HKT will continue to during the period across a customer base of nearly 1.3 million. innovate and to provide customers with the best networks and Our strategy is to grow the online, mobile and OTT (over-the-top) best services. video and music businesses while maintaining our leadership in the pay-TV market in Hong Kong. In this connection, PCCW Media The property business of the Group, Pacific Century Premium acquired in March a leading mobile video-on-demand service, Developments, made good construction progress with its Vuclip, which will accelerate the development of our digital OTT Premium Grade A building in Jakarta, Indonesia, and is stepping service in the region. up development of the Hokkaido resort project in Japan. The company will continue to identify new development and Meanwhile, preparation for the launch of free TV service has been investment opportunities around the world. actively in progress since the Government’s formal grant of a license to HK Television Entertainment Company Limited (HKTVE) The global economic recovery is still faced with various in April. On July 31, the Government announced it would grant to uncertainties and the Hong Kong economy remains slow. We will HKTVE broadcast spectrum for the delivery of its service. monitor local and external conditions closely, and shall continue to remain relevant to our customers by building value-added services PCCW Solutions saw continued growth in the first half. It has and maintaining our leadership in the market. strengthened its management resources to facilitate digital transformation of enterprises and tap the growing demand for enterprise solutions in Hong Kong as well as mainland China. In June, it enhanced its commerce and marketing solutions offerings to help enterprises in a range of industries manage their customer relationships and deploy next-generation solutions in the cloud or on-premise.
Richard Li Chairman August 6, 2015
PCCW interim report 2015 3 STATEMENT FROM THE GROUP MANAGING DIRECTOR
It is my pleasure to report that the Group’s businesses made good Vuclip’s patented Dynamic Adaptive Transcoding technology progress in developing their objectives and plans during the first can deliver high-quality video content across variable network half of 2015. conditions, uniquely addressing such challenges in emerging markets. Furthermore, its integrated billing solution developed ACCELERATING OTT MEDIA PLATFORM with telecom partners in various markets will enable us to fast DEVELOPMENT track our OTT video and music service expansion and the As Hong Kong’s largest pay-TV operator, now TV continued to development of a platform that provides immediate access grow this year based on the most comprehensive content in the to PCCW Media’s premium Asian content set across a much market and its leading TV-everywhere offering as mobile apps expanded audience base in the Asian continent, the Middle East and on multi-screens that meets the needs of viewers’ media and other regions. consumption habits. It recorded a further increase in ARPU (average revenue per user) on the back of a substantial customer MEETING ENTERPRISE SOLUTIONS NEEDS base of almost 1.3 million. The introduction of simplified pricing The Group’s enterprise IT service flagship, PCCW Solutions, tiers and re-packaging of the TV channel offerings during the continued to record satisfactory results due to organic growth period have been well received by the market, while creating during the first half under a strengthened top management team. opportunities for up-sell. The company registered a number of contract renewals and new wins including long-term projects in both the private and the In April, the Government formally granted a Domestic Free public sectors in Hong Kong. Television Programme Service License to HK Television Entertainment Company Limited (HKTVE) for a period of 12 In mainland China, PCCW Solutions also benefited from the years. Preparation for the launch of the service by April 2016 growing demand for enterprise applications. Its next-generation is actively underway. We are happy to note that on July 31, the core banking solutions were well received in particular by auto Government decided to assign to HKTVE 0.5 MFN (multiple finance and peer-to-peer finance entities. PCCW Solutions has frequency network) of the broadcast spectrum to be released from boosted its resources with a focus on tapping the application an exiting licensee. HKTVE will be able to reach a larger audience and cloud services demand in the mid-market in Hong Kong and in the shortest time via digital terrestrial television transmission. mainland China. HKTVE is studying the proposed terms and conditions of the allocation and looks forward to finalizing the free TV license. As customers are digitally connected and socially networked, HKTVE notes that the spectrum to be granted to it is one-third of the need for enterprise solutions that simplify engagement with the spectrum to be released from the exiting licensee, and hopes customers and create a holistic customer view across marketing, the Government will continue to assess the equitable allocation of commerce, sales, and service interactions has been growing spectrum. quickly. In June, PCCW Solutions extended its partnership with SAP by announcing collaboration with hybris software to grow and The media business has also set its vision outside Hong Kong with enhance the commerce and marketing solutions for enterprises in the goal of offering industry leading OTT (over-the-top) services Hong Kong and mainland China. We will leverage our respective in Asia and beyond. In March, the media business entered industry and solutions expertise and develop integrated into an agreement to acquire a controlling majority interest in a go-to-market strategies for consumer products, wholesale, leading mobile video-on-demand service platform with a view to logistics, retail and manufacturing industries. furthering its OTT expansion strategy. The Silicon Valley-based company, Vuclip, has more than seven million subscribers and an extensive footprint spanning India, Indonesia, Malaysia, Thailand, the United Arab Emirates and Egypt, with rollout plans for other Southeast Asian markets in 2015.
4 PCCW interim report 2015 MARKET-LEADING TELECOM SERVICES PCPD is stepping up development of the Hokkaido resort project, HKT’s various lines of business continued to perform well against having signed a letter of intent with a 5-star hotel management a soft local economy and sustained market competition. group. Meanwhile, preparation of the Phang-nga project is also underway as scheduled. The fixed broadband business continued its steady growth in both the residential and commercial markets, maintaining a strong Property development and investment remain the core business of customer base which contributes a solid cashflow to the Group. PCPD, which is currently looking for new opportunities around the During the period, we again recorded an increase in the number world to leverage its brand and successful track record. of customers using our genuine fiber-to-the-home (FTTH) service, which represents a growth driver for the business. A new 10Gbps OUTLOOK fiber broadband service has been commercially launched in the The investments in the Media OTT video platform, the expanded third quarter of 2015. suite of e-commerce solutions and the new mobile payment service have demonstrated the Group’s resolve to address the HKT has been on track in the integration of CSL to release needs of consumers and enterprises as they embrace the digital synergies and to enhance customers’ mobile experience. In April, lifestyle. We will continue on our journey to becoming the digital we successfully demonstrated our LTE-A 450Mbps network transformation partner of choice of our customers. capability, and expect to activate commercial service once compatible smartphones become available in 2016. The media business continues to strengthen now TV’s content set with exclusive sports and other genres in its bid to maintain its Recently, we have introduced a payment service, branded as leading position in Hong Kong’s pay-TV market, while developing Tap & Go, whereby customers can use a Near Field new initiatives to provide extra momentum for growth. Communication (NFC)-enabled mobile phone with an all-in-one SIM card to make payments at more than three million retail outlets PCCW Solutions will apply its enhanced capabilities and target in Hong Kong and overseas, for online purchase, and even to industry segments in Hong Kong and mainland China that have instantly transfer money to friends via phone-to-phone connection. the greatest need for enterprise IT solutions to enhance customer experience, drive new streams of revenue, increase automation PCCW Global also delivered encouraging operational performance and reduce costs. in the first half on growing international connectivity demand by enterprises and carriers in its expanding footprint. On telecommunications, our continuous enhancement of user experience in both fixed and mobile services – such as the PROPERTY DEVELOPMENT AND INVESTMENT 10Gbps broadband and the mobile payment services – will fuel The property business of the Group, Pacific Century Premium further growth of these segments. Developments (PCPD), continued with the development of its premium office project in Indonesia and the resorts in Japan In the second half of 2015, the local economic outlook appears and Thailand. to stay modest and there are uncertainties affecting the pace of the global economic recovery. With our sound operational and The Jakarta project proceeded well with the completion of the financial metrics, PCCW Group is ready and well positioned for foundation and two basement levels. Our aim is to construct any challenges and opportunities that may arise. a Premium Grade A office building that meets some of the highest international standards in environmental protection and sustainable development. PCPD is confident that the building will become fully operational in 2017. A number of corporations have expressed interest in renting office space in the building, while a letter of intent with an international banking group has already been signed.
BG Srinivas Group Managing Director August 6, 2015
PCCW interim report 2015 5 BOARD OF DIRECTORS
EXECUTIVE DIRECTORS
LI Tzar Kai, Richard programs at Wharton Business School, Ms Hui graduated with a bachelor’s Chairman US, and Indian Institute of Management degree in social sciences from the Mr Li, aged 48, was appointed an Ahmedabad (IIMA), India. Prior to joining University of Hong Kong with first class Executive Director and the Chairman of PCCW, Mr Srinivas has worked for the honours. She is a qualified accountant PCCW in August 1999. He is the Chairman last 15 years with Infosys Group, where and a member of both the Hong Kong of PCCW’s Executive Committee and a his last role was the President and Institute of Certified Public Accountants member of the Nomination Committee of Whole-time Director of Infosys Limited. and the American Institute of Certified the Board. He is also the Chairman and He has also acted as Chairman of the Public Accountants. Chief Executive of the Pacific Century board of Infosys Lodestone and a member LEE Chi Hong, Robert Group, the Executive Chairman and an of the board of Infosys Sweden. Prior to Executive Director Executive Director of HKT Limited (HKT) that, Mr Srinivas worked for 14 years with Mr Lee, aged 64, was appointed an and HKT Management Limited, the Asea Brown Boveri Group, where he held Executive Director of PCCW in trustee-manager of the HKT Trust, the several leadership positions. Mr Srinivas September 2002. He is a member of Chairman of HKT’s Executive Committee has been on the panel of judges for the PCCW’s Executive Committee and is a and a member of HKT’s Nomination European Business Awards (EBA) for Director of certain PCCW subsidiaries. Committee, an Executive Director and the three consecutive years and is a frequent He is also an Executive Director, Chairman of Pacific Century Premium speaker at academic institutions such the Chief Executive Officer and Developments Limited (PCPD), the as INSEAD and Saïd Business School, Deputy Chairman of Pacific Century Chairman of PCPD’s Executive Committee, Oxford. Premium Developments Limited a member of PCPD’s Remuneration (PCPD) and a member of PCPD’s Committee and Nomination Committee, HUI Hon Hing, Susanna Executive Committee. the Chairman and an Executive Director of Group Chief Financial Officer Singapore-based Pacific Century Regional Ms Hui, aged 50, was appointed an Mr Lee was previously an Executive Developments Limited (PCRD), and the Executive Director of PCCW in May 2010. Director of Sino Land Company Limited Chairman of PCRD’s Executive Committee. She is a member of PCCW’s Executive (Sino Land), at which his responsibilities Committee. She has been the Group included sales, finance, acquisitions, Mr Li is an Independent Non-Executive Chief Financial Officer of PCCW since investor relations, marketing and property Director of The Bank of East Asia, April 2007 and holds directorships in management. Prior to joining Sino Land, Limited. He is also a member of the various PCCW group companies. She is Mr Lee was a senior partner at Deacons Center for Strategic and International also an Executive Director of HKT Limited in Hong Kong, where he specialized Studies’ International Councillors’ Group (HKT) and HKT Management Limited, in banking, property development, corporate finance and dispute resolution in Washington, D.C., and a member of the trustee-manager of the HKT Trust. in Hong Kong and mainland China. the Global Information Infrastructure Ms Hui is a member of HKT’s Executive Before that, he was a solicitor with the Commission. Mr Li was awarded the Committee and the Group Chief Financial London firm Pritchard Englefield & Tobin Lifetime Achievement Award by the Cable Officer of HKT. Prior to her appointment (now Thomas Eggar incorporating & Satellite Broadcasting Association of as the Group Chief Financial Officer of Pritchard Englefield). He was enrolled as a Asia in November 2011. PCCW, Ms Hui was the Director of Group solicitor in the United Kingdom in 1979 Finance of PCCW from September 2006 and admitted as a solicitor in Hong Kong Srinivas Bangalore GANGAIAH to April 2007. Before that, Ms Hui was in 1980. Mr Lee became a Notary Public (aka BG Srinivas) the Director of Finance of PCCW, with in Hong Kong in 1991. Group Managing Director responsibility for the telecommunications Mr Srinivas, aged 54, was appointed an services sector and regulatory accounting. Mr Lee had also served as a member Executive Director and Group Managing Ms Hui was the Chief Financial Officer of the panel of arbitrators of the China Director of PCCW in July 2014. He is a of Pacific Century Premium International Economic and Trade member of PCCW’s Executive Committee. Developments Limited from July 2009 to Arbitration Commission of the China He is also a Non-Executive Director of November 2011. Council for the Promotion of International HKT Limited (HKT) and HKT Management Trade in Beijing. Limited, the trustee-manager of the Prior to joining Cable & Wireless HKT Trust. HKT Limited (which was subsequently Mr Lee is a member of the International acquired by PCCW) in September 1999, Council of the Louvre as well as Mr Srinivas holds a degree in mechanical Ms Hui was the chief financial officer of Ambassador for the Louvre in China. engineering from Bangalore University, a listed company engaged in hotel and India, and has participated in executive property investment and management. He graduated from Cornell University in the United States in 1975 with a bachelor’s degree in political science.
6 PCCW interim report 2015 NON-EXECUTIVE DIRECTORS
Sir David FORD, KBE, LVO 2000 until June 2009, he was Chairman LU Yimin Non-Executive Director and Chief Executive Officer of American Deputy Chairman Sir David, aged 80, was appointed a International Assurance Company, Limited Mr Lu, aged 51, became a Non-Executive Non-Executive Director of PCCW in and from 2005 until April 2015, he was Director of PCCW in May 2008. He June 2002 and is a Director of certain the Chairman of The Philippine American was appointed Deputy Chairman in PCCW subsidiaries. He is also a Director Life and General Insurance Company. November 2011 and is a member of of certain companies controlled by Mr Tse has held various senior positions PCCW’s Executive Committee. He is also Mr Li Tzar Kai, Richard, the Chairman and directorships in other AIG companies. a Non-Executive Director of HKT Limited of PCCW. He started his working life as Mr Tse is also the Non-Executive (HKT) and HKT Management Limited, an army officer in the Royal Artillery and Chairman for Asia ex-Japan of PineBridge the trustee-manager of the HKT Trust, served in five continents. During his last Investments Asia Limited and a Director of and a member of HKT’s Remuneration five years with the army, he served with Bridge Holdings Company Limited which Committee, Nomination Committee and the Commando Brigade and saw active are asset management companies owned Executive Committee. service in Aden and Borneo. indirectly by Mr Li Tzar Kai, Richard, the Chairman of PCCW. Mr Tse was a Mr Lu is an Executive Director and Sir David left the army in 1972 and Non-Executive Director of PICC Property President of China Unicom (Hong subsequently spent more than 20 years and Casualty Company Limited from Kong) Limited. He is Vice Chairman and in Hong Kong, holding a number of June 2004 until July 2014. President of 中國聯合網絡通信集團 appointments as a senior civil servant 有限公司 (China United Network in the Hong Kong Government and one Mr Tse was awarded the Gold Bauhinia Communications Group Company appointment in the Northern Ireland Star by the Government of the Hong Limited#). He is also a Director and Office. Kong Special Administrative Region in President of China United Network 2001 in recognition of his outstanding Communications Limited and a Director He attended the Royal College of Defence efforts in respect of the development of and President of China United Network Studies in 1982. He was Chief Secretary Hong Kong’s insurance industry. Mr Tse Communications Corporation Limited. and Deputy Governor of the Hong Kong graduated with a Bachelor of Arts degree Government from 1986 to 1993, before in Mathematics from the University Mr Lu joined China Network becoming the Hong Kong Commissioner of Hong Kong (HKU) in 1960. HKU Communications Group Corporation (CNC) in London until the change of sovereignty conferred an Honorary Fellowship and in December 2007, serving as senior in Hong Kong in 1997. an Honorary Doctorate Degree in Social management. Prior to joining CNC, Mr Lu Sciences on Mr Tse in 1998 and 2002 was a member of the Secretary Bureau TSE Sze Wing, Edmund, GBS respectively. He also obtained diplomas of the General Office of the Chinese Non-Executive Director from the College of Insurance and the Communist Party Central Committee, Mr Tse, aged 77, is a Non-Executive Graduate School of Business of Stanford serving as the Deputy Director and the Director of PCCW. He was an Independent University. He has extensive management Director of the Information Processing Non-Executive Director of PCCW from experience in the insurance market, both Office since 1992, Secretary at deputy September 2009 to March 2011 and was in Asia and globally. In 2003, Mr Tse was director general level since 2001 and re-designated to a Non-Executive Director elected to the Insurance Hall of Fame, Secretary at director general level of PCCW in March 2011. He is also a and is so far the only Chinese to receive since 2005. member of the Regulatory Compliance this most prestigious award in the global Committee of the Board. insurance industry. Mr Tse serves many Mr Lu is a researcher level senior community and professional organizations engineer and has extensive experience in Mr Tse is the Non-Executive Chairman as well as educational institutions. He is government administration and business and a Non-Executive Director of also a director of AIA Foundation, which management. He graduated from AIA Group Limited. From 1996 until June supports charitable causes in Hong Kong. Shanghai Jiao Tong University in 1985 2009, Mr Tse was Director of American with a bachelor’s degree in computer International Group, Inc. (AIG) and from science and then was awarded a master’s 2001 until June 2009, he was Senior Vice degree in public administration by the Chairman – Life Insurance of AIG. From John F. Kennedy School of Government at Harvard University in the United States. # For identification only
PCCW interim report 2015 7 BOARD OF DIRECTORS (CONTINUED)
LI Fushen ZHANG Junan WEI Zhe, David Non-Executive Director Non-Executive Director Non-Executive Director Mr Li, aged 52, became a Non-Executive Mr Zhang, aged 58, became a Mr Wei, aged 44, is a Non-Executive Director of PCCW in July 2007 and is a Non-Executive Director of PCCW in Director of PCCW. He was appointed member of the Nomination Committee August 2014 and is a member of the an Independent Non-Executive Director of the Board. He is also a Non-Executive Remuneration Committee of the Board. of PCCW in November 2011 and was Director of HKT Limited (HKT) and HKT re-designated to a Non-Executive Director Management Limited, the trustee-manager Mr Zhang is a Vice President of 中國聯合 of PCCW in May 2012. He is also a of the HKT Trust and is a member of 網絡通信集團有限公司 (China United member of the Remuneration Committee HKT’s Regulatory Compliance Committee. Network Communications Group of the Board. Company Limited#) and an Executive Mr Li is an Executive Director and Director and Senior Vice President of Mr Wei has over 15 years of experience Chief Financial Officer of China Unicom China Unicom (Hong Kong) Limited in both investment and operational (Hong Kong) Limited (Unicom HK). (Unicom HK). He is also a Director of management in the People’s Republic of He is a Director, Vice President and China United Network Communications China. Prior to launching Vision Knight Chief Accountant of 中國聯合網絡 Limited and a Director and Senior Vice Capital (China) Fund I, L.P., a private 通信集團有限公司 (China United Network President of China United Network equity investment fund in 2011, Mr Wei Communications Group Company Communications Corporation Limited. was an executive director and chief Limited#). He is also a Director of China executive officer of Alibaba.com Limited, United Network Communications Limited Mr Zhang joined 中國聯合網絡通信集團 a leading worldwide B2B e-commerce and a Director and Senior Vice President 有限公司 (China United Network company, for about five years, where he of China United Network Communications Communications Group Company successfully led the company through its Corporation Limited. Limited#) in December 2005 and initial public offering and listing on The currently serves as Vice President. Stock Exchange of Hong Kong Limited in He served as a Senior Vice President of Mr Zhang was appointed as Vice 2007. Alibaba.com Limited was delisted in Unicom HK from February 2009 to March President of Unicom HK in April 2006, June 2012. Prior to Alibaba.com Limited, 2011. He served as an Executive Director Executive Director of Unicom HK Mr Wei was the president, from 2002 to of China Netcom Group Corporation from April 2006 to October 2008 and 2006, and chief financial officer, from (Hong Kong) Limited (CNC HK) since Senior Vice President of Unicom HK in 2000 to 2002, of B&Q China, the then January 2007 and as Chief Financial February 2009. He previously served subsidiary of Kingfisher plc, a leading Officer of CNC HK since September 2005. as a Director of Bengbu Municipal home improvement retailer in Europe He served as Joint Company Secretary Posts and Telecommunications Bureau and Asia. Under Mr Wei’s leadership, of CNC HK from December 2006 to in Anhui Province and a Deputy B&Q China grew to become China’s March 2008. Since October 2005, Director of Anhui Provincial Posts largest home improvement retailer. he has served as Chief Accountant of and Telecommunications Bureau. From 2003 to 2006, Mr Wei was also China Network Communications Group From 2000 to 2005, he served as the chief representative for Kingfisher’s Corporation (CNC). From October 2003 a Deputy General Manager and China sourcing office, Kingfisher Asia to August 2005, he served as General General Manager of Anhui Provincial Limited. Prior to that, Mr Wei served Manager of the Finance Department of Telecommunications Company and as the head of investment banking at CNC. From November 2001 to October Chairman and General Manager of Orient Securities Company Limited from 2003, he served as Deputy General Anhui Provincial Telecommunications 1998 to 2000, and as corporate finance Manager of the former Jilin Provincial Co., Limited. In addition, Mr Zhang manager at Coopers & Lybrand (now part Telecommunications Company and serves as a Non-Executive Director of PricewaterhouseCoopers) from 1995 Jilin Communications Company. of China Communications Services to 1998. Mr Wei was a non-executive Corporation Limited. director of HSBC Bank (China) Company Mr Li graduated from the Australian Limited and The Hongkong and Shanghai National University with a master’s degree Mr Zhang graduated from Banking Corporation Limited, and was in management in 2004, and from the Nanjing University of Posts and also the vice chairman of China Chain Jilin Engineering Institute with a degree Telecommunications majoring in Store & Franchise Association. He was in engineering management in 1988. carrier communication in 1982, voted as one of “China’s Best CEOs” by Mr Li has worked in the telecommunications received a master’s degree in Business FinanceAsia magazine in 2010. Mr Wei industry for a long period of time and has Administration from Australian National is also an independent director of Leju extensive management experience. University in 2002 and received a doctor’s Holdings Limited and 500.com Limited degree in Business Administration from which are listed on the New York Stock Hong Kong Polytechnic University in Exchange, and Shanghai M&G Stationery 2008. Mr Zhang has worked in the Inc. which is listed on the Shanghai telecommunications industry for a long Stock Exchange. period of time and has rich management experience. He holds a bachelor’s degree in international business management from Shanghai International Studies University and has completed a corporate finance # For identification only program at London Business School.
8 PCCW interim report 2015 INDEPENDENT NON-EXECUTIVE DIRECTORS
Dr The Hon Sir David LI Kwok Po, He joined the Board following a Mr Mehta is also a member of the GBM, GBS, OBE, JP distinguished career in the international Governing Board of Indian School of Independent Non-Executive Director banking community. Mr Mehta held Business, Hyderabad, and a member Sir David, aged 76, was appointed a the position of Chief Executive Officer of of the Advisory Panel of Prudential Director of PCCW in October 2000. He The Hongkong and Shanghai Banking Financial Inc. in the United States. was previously a Non-Executive Deputy Corporation Limited (HSBC) until Chairman of the former Hong Kong-listed December 2003, when he retired. Frances Waikwun WONG Cable & Wireless HKT Limited and served Independent Non-Executive Director as a Director from November 1987 to Born in India in 1946, Mr Mehta joined Ms Wong, aged 53, was appointed August 2000. He is a member of the HSBC group in Bombay in 1967. After an Independent Non-Executive Remuneration Committee, the Nomination a number of assignments throughout Director of PCCW in March 2012 and Committee and the Regulatory Compliance HSBC group, he was appointed is the Chairwoman of the Regulatory Committee of the Board. Manager – Corporate Planning at HSBC’s Compliance Committee, and a member headquarters in Hong Kong in 1985. of the Nomination Committee and the Sir David is the Chairman and Chief After a three-year posting to Riyadh in Remuneration Committee of the Board. Executive of The Bank of East Asia, Saudi Arabia, he was appointed Group She is also an Independent Non-Executive Limited. He is also a Director of General Manager in 1991, and General Director of HKT Limited (HKT) and HKT Guangdong Investment Limited, The Hong Manager – International the following Management Limited, the trustee-manager Kong and China Gas Company Limited, year, with responsibility for overseas of the HKT Trust, and the Chairwoman of The Hongkong and Shanghai Hotels, subsidiaries. He subsequently held senior HKT’s Remuneration Committee, and an Limited, Hong Kong Interbank Clearing positions in the United States, overseeing Independent Non-Executive Director of Limited, San Miguel Brewery Hong Kong HSBC group companies in the Americas Pacific Century Regional Developments Limited, SCMP Group Limited and Vitasoy and later becoming responsible for Limited. International Holdings Limited. He was HSBC’s operations in the Middle East. a Director of China Overseas Land & Ms Wong is currently a financial advisor of Investment Limited, AFFIN Holdings In 1998, Mr Mehta was reappointed Good Harbour Finance Limited. She began Berhad and CaixaBank, S.A. General Manager – International, after her career as a management consultant at which he became Executive Director McKinsey & Company in the United States Sir David is the Chairman of International. In 1999, he was appointed in 1986. Ms Wong returned to Hong Kong The Chinese Banks’ Association Limited Chief Executive Officer, a position he held and joined the Hutchison Whampoa and a member of the Council of the until retirement. group of companies in 1988, taking on Treasury Markets Association. He was various positions. She was managing a member of the Legislative Council of Following his retirement in December director of Weatherite Manufacturing Hong Kong and a member of the Banking 2003, Mr Mehta took up residence Limited, an air conditioning manufacturer. Advisory Committee. in New Delhi. He is an Independent Later, Ms Wong became chief executive Director on the board of several public officer of Metro Broadcast Corporation Aman MEHTA companies and institutions in India and Limited. Eventually, she became chief Independent Non-Executive Director internationally. He is an Independent financial officer of Star TV, Asia’s first Mr Mehta, aged 68, became an Non-Executive Director of Vedanta satellite television company. After leaving Independent Non-Executive Director Resources plc in the United Kingdom, the Hutchison Whampoa Group in 1992, of PCCW in February 2004 and is the Tata Consultancy Services Limited, Godrej she became group chief financial officer Chairman of the Audit Committee, Consumer Products Limited, Jet Airways for the Pacific Century Group. After she the Nomination Committee and the (India) Limited and Wockhardt Limited in resigned from the Pacific Century Group, Remuneration Committee of the Board. Mumbai, India; and Max India Limited and she founded the Independent Schools He is also an Independent Non-Executive Cairn India Limited in New Delhi, India. Foundation in Hong Kong in 2000. Director of HKT Limited (HKT) He was an Independent Non-Executive and HKT Management Limited, Director of Emaar MGF Land Limited the trustee-manager of the HKT Trust, and an Independent Director on the and the Chairman of HKT’s Supervisory Board of ING Groep N.V., Nomination Committee. a Netherlands company.
PCCW interim report 2015 9 BOARD OF DIRECTORS (CONTINUED)
Ms Wong was educated in the United numerous transactions for industry David Christopher CHANCE States at Stanford University where she leaders in the TMT (telecom, media and Independent Non-Executive Director received a Bachelor of Science degree. technology) and cleantech sectors in Mr Chance, aged 58, was appointed an She holds a Master of Science degree the United States and globally. Over his Independent Non-Executive Director of from the Massachusetts Institute of 19 years at Credit Suisse, Mr Lee has PCCW and the Independent Technology. Ms Wong was a member of executed and advised on over Non-Executive Chairman and Director of the Central Policy Unit, the Government US$88.7 billion capital markets and PCCW Media Limited, an indirect of the Hong Kong Special Administrative M&A advisory transactions globally for wholly-owned subsidiary of PCCW in Region (think tank). She has served on public and private TMT and cleantech November 2013. many educational boards including the companies. Mr Lee holds a Bachelor of Arts Canadian International School of Hong degree in Economics and Asian Languages Mr Chance is the Non-Executive Chairman Kong, The Open University of Hong Kong from Stanford University. of Modern Times Group MTG AB and the and was a member of the Joint Committee Non-Executive Chairman of Top Up TV on Student Finance of Student Financial Lars Eric Nils RODERT Ltd. He is also a Non-Executive Director Assistance Agency. Independent Non-Executive Director of Olswang LLP, an international law firm. Mr Rodert, aged 54, was appointed an He has significant senior management Bryce Wayne LEE Independent Non-Executive Director of experience particularly in the area of Independent Non-Executive Director PCCW in November 2012 and is pay television having been formerly the Mr Lee, aged 50, was appointed an a member of the Audit Committee of Executive Chairman of Top Up TV Ltd. Independent Non-Executive Director of the Board. between 2003 and 2011 and the PCCW in May 2012 and is a member Deputy Managing Director of British Sky - of the Audit Committee and the Mr Rodert is a director of ÖstVast Broadcasting Group plc between 1993 Remuneration Committee of the Board. Capital Management. He is a director and 1998. He was also a Non-Executive of Brookfield Property Partners L.P.’s Director of ITV plc and O2 plc. He Mr Lee is a partner of Silver Lake General Partner since April 2013 and graduated with a Bachelor of Arts degree, Kraftwerk, an investment strategy that he served as a director of Brookfield a Bachelor of Science degree and a provides growth capital in the energy and Infrastructure Partners L.P.’s Managing Master of Business Administration degree resource sectors. Previously, he was a General Partner from December 2010 from the University of North Carolina. managing director of Credit Suisse Group to April 2013. He was a Senior Portfolio AG (Credit Suisse) in the Investment Manager for Inter IKEA Treasury in Banking division, serving as head of the North America and Europe. Prior to Technology Group for the Americas and as this role, he was most recently Chief co-head of the Alternative Energy Group. Investment Officer, Global Equities, at Mr Lee was instrumental in building Credit SEB Asset Management and prior to that Suisse’s investment banking franchises he was Head of North American Equities in Asia and in cleantech, and was named at the same firm. Based in Belgium, to Forbes magazine’s “Midas List” of Mr Rodert has an in depth knowledge the top 100 technology dealmakers in of continental European markets and the world. He was a member of Credit is seasoned in analyzing investment Suisse’s Investment Banking Committee opportunities. He holds a Bachelor of Arts and served on the Managing Director degree from Stockholm University, with a Evaluation Committee. Mr Lee has led major in finance.
10 PCCW interim report 2015 MANAGEMENT’S DISCUSSION AND ANALYSIS
Core revenue increased by 25% to HK$17,983 million; consolidated revenue (including PCPD) increased by 23% to HK$18,082 million Core EBITDA increased by 30% to HK$5,784 million; consolidated EBITDA (including PCPD) increased by 30% to HK$5,683 million Consolidated profit attributable to equity holders of the Company increased by 1% to HK$1,070 million; basic earnings per share amounted to 14.39 HK cents Interim dividend of 7.96 HK cents per ordinary share
MANAGEMENT REVIEW OUTLOOK PCCW registered a satisfactory result for the six months ended The investments in the Media over-the-top (“OTT”) video platform, June 30, 2015 demonstrating the operational and financial the expanded suite of e-commerce solutions and the new mobile resilience across all of our core business lines. payment service have demonstrated the Group’s resolve to address the needs of consumers and enterprises as they embrace Core revenue for the six months ended June 30, 2015 increased the digital lifestyle. We will continue on our journey to becoming by 25% to HK$17,983 million. Core EBITDA increased by the digital transformation partner of choice of our customers. 30% to HK$5,784 million. These results reflect the benefits of the successful integration of CSL since the completion of The Media business continues to strengthen now TV’s content the acquisition in May 2014, the continued investment in new set with exclusive sports and other genres in its bid to maintain its initiatives in our Media business and the steady growth in our leading position in Hong Kong’s pay-TV market, while developing Solutions business. new initiatives to provide extra momentum for growth.
Including PCPD, consolidated revenue for the six months ended PCCW Solutions will apply its enhanced capabilities and target June 30, 2015 increased by 23% to HK$18,082 million and industry segments in Hong Kong and mainland China that have consolidated EBITDA increased by 30% to HK$5,683 million. the greatest need for enterprise IT solutions to enhance customer Consolidated profit attributable to equity holders of the Company experience, drive new streams of revenue, increase automation increased by 1% to HK$1,070 million. Basic earnings per share and reduce costs. were 14.39 HK cents. On telecommunications, our continuous enhancement of user The board of Directors (the “Board”) has resolved to declare an experience in both fixed and mobile services – such as the interim dividend of 7.96 HK cents per ordinary share for 10Gbps broadband and the mobile payment services – will fuel the six months ended June 30, 2015. further growth of these segments.
In the second half of 2015, the local economic outlook appears to stay modest and there are uncertainties affecting the pace of the global economic recovery. With our sound operational and financial metrics, PCCW Group is ready and well positioned for any challenges and opportunities that may arise.
Note: Core revenue refers to consolidated revenue excluding Pacific Century Premium Developments Limited (“PCPD”), the Group’s property development and investment business; core EBITDA refers to consolidated EBITDA excluding PCPD.
PCCW interim report 2015 11 MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)
FINANCIAL REVIEW BY SEGMENT
For the six months ended June 30, December 31, June 30, Better/ HK$ million 2014 2014 2015 (Worse) y-o-y
Revenue HKT 12,520 16,303 15,974 28% Media Business 1,487 1,744 1,590 7% Solutions Business 1,459 1,911 1,500 3% Other Businesses 18 26 25 39% Eliminations (1,044) (1,462) (1,106) (6)%
Core revenue 14,440 18,522 17,983 25% PCPD 224 91 99 (56)%
Consolidated revenue 14,664 18,613 18,082 23%
Cost of sales (6,782) (8,369) (8,027) (18)% Operating costs before depreciation, amortization, and (loss)/gain on disposal of property, plant and equipment, net (3,506) (4,280) (4,372) (25)%
EBITDA1 HKT 4,425 5,817 5,770 30% Media Business 180 272 182 1% Solutions Business 232 390 246 6% Other Businesses (301) (329) (324) (8)% Eliminations (79) (101) (90) (14)%
Core EBITDA1 4,457 6,049 5,784 30% PCPD (81) (85) (101) (25)%
Consolidated EBITDA1 4,376 5,964 5,683 30%
Core EBITDA1 margin 31% 33% 32% Consolidated EBITDA1 margin 30% 32% 31%
Depreciation and amortization (2,517) (3,786) (2,930) (16)% (Loss)/Gain on disposal of property, plant and equipment, net (2) – 4 NA Other gains, net 688 2,029 60 (91)% Interest income 45 45 35 (22)% Finance costs (573) (845) (764) (33)% Share of results of associates and joint ventures 9 41 13 44%
Profit before income tax 2,026 3,448 2,101 4%
12 PCCW interim report 2015 Note 1 EBITDA represents earnings before interest income, finance costs, income tax, depreciation of property, plant and equipment, amortization of land lease premium and intangible assets, gain/loss on disposal of property, plant and equipment, investment properties, interests in leasehold land and intangible assets, net other gains/losses, losses on property, plant and equipment, restructuring costs, impairment losses on goodwill, tangible and intangible assets and interests in associates and joint ventures, and the Group’s share of results of associates and joint ventures. While EBITDA is commonly used in the telecommunications industry worldwide as an indicator of operating performance, leverage and liquidity, it is not presented as a measure of operating performance in accordance with the Hong Kong Financial Reporting Standards and should not be considered as representing net cash flows from operating activities. The computation of the Group’s EBITDA may not be comparable to similarly titled measures of other companies.
Note 2 Gross debt refers to the principal amount of short-term borrowings and long-term borrowings.
Note 3 Group capital expenditure includes additions to property, plant and equipment and interests in leasehold land.
HKT
For the six months ended June 30, December 31, June 30, Better/ HK$ million 2014 2014 2015 (Worse) y-o-y
HKT Revenue 12,520 16,303 15,974 28% HKT EBITDA1 4,425 5,817 5,770 30% HKT EBITDA1 margin 35% 36% 36% HKT Adjusted Funds Flow 1,590 1,764 1,953 23%
HKT reported solid financial results during the six months ended HKT announced an interim distribution of 25.79 HK cents per June 30, 2015 demonstrating its strong market position across all share stapled unit. of its lines of business and the successful integration of CSL since the completion of the acquisition in May 2014. For a more detailed review of the performance of HKT, please refer to its 2015 interim results announcement released on Total revenue for the six months ended June 30, 2015 increased August 5, 2015. by 28% to HK$15,974 million and total EBITDA for the period was HK$5,770 million, an increase of 30% over the same period in 2014. Adjusted funds flow for the six months ended June 30, 2015 reached HK$1,953 million, an increase of 23% over the same period in 2014.
PCCW interim report 2015 13 MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)
Media Business
For the six months ended June 30, December 31, June 30, Better/ HK$ million 2014 2014 2015 (Worse) y-o-y
Media Business Revenue 1,487 1,744 1,590 7% Media Business EBITDA1 180 272 182 1% Media Business EBITDA1 margin 12% 16% 11%
Revenue for the Media business for the six months ended During the first half of 2015, the Group acquired Vuclip, Inc. June 30, 2015 increased by 7% to HK$1,590 million from (“Vuclip”), a leading premium mobile video-on-demand service HK$1,487 million a year earlier, driven by a 6% revenue growth provider for emerging markets, with a view to furthering the OTT in its core pay-TV business and a 17% revenue growth in new expansion strategy of the Media business. Vuclip currently has business initiatives such as OTT. more than seven million subscribers and an extensive footprint spanning India, Indonesia, Malaysia, Thailand, the United Arab The steady growth in the core pay-TV business was underpinned Emirates and Egypt. by an expansion of average revenue per user (“ARPU”) across its substantial customer base. The total installed now TV subscriber EBITDA for the six months ended June 30, 2015 was base reached 1,292,000 by the end of June 2015, representing HK$182 million as compared to HK$180 million a year earlier, a net gain of 23,000 subscribers or an increase of 2% from reflecting investments made in new business initiatives as well 12 months ago. now TV’s exit ARPU continued to increase, as costs incurred in the preparation for the launch of the free TV rising 3% year-on-year from HK$191 to HK$196 per month business. reflecting the positive impact from our newly introduced pay-TV packages with simplified pricing.
14 PCCW interim report 2015 Solutions Business
For the six months ended June 30, December 31, June 30, Better/ HK$ million 2014 2014 2015 (Worse) y-o-y
Solutions Business Revenue 1,459 1,911 1,500 3% Solutions Business EBITDA1 232 390 246 6% Solutions Business EBITDA1 margin 16% 20% 16%
Revenue generated by the Solutions business for the six months PCPD ended June 30, 2015 increased by 3% to HK$1,500 million from PCPD recorded total revenue of HK$99 million and negative HK$1,459 million a year ago. Of the revenue generated in the EBITDA of HK$101 million for the six months ended first half of 2015, 60% was of a recurring nature while 40% was June 30, 2015, compared with total revenue of HK$224 million project based. and negative EBITDA of HK$81 million a year earlier.
The Solutions business maintained a well diversified business PCPD’s development of a Grade A office building in the central across a wide range of service offerings. Revenue by service line business district of Jakarta, Indonesia continued to make for the six months ended June 30, 2015 was: Cloud Solutions encouraging progress. After the completion of the foundation and & Infrastructure 30%, Enterprise Applications 25%, Technical the basement wall, the construction works of two basement levels Services 23%, Application Development & Maintenance 14% and were completed as at June 30, 2015. Construction of additional Business Process Outsourcing 8%. Revenue by client industry levels is underway and the building is expected to become for the six months ended June 30, 2015 was: Public Sector 34%, operational in 2017. The resort projects in Hokkaido, Japan, and Telecommunications 31%, Hi-Tech & Media 11%, Travel and Phang-nga, Thailand, also proceeded in accordance with their Hospitality 8%, Banking/Financial Services & Insurance 6%, respective schedules. Retail and Manufacturing 6% and other industries 4%. After the disposal of Pacific Century Place, Beijing, PCPD is EBITDA for the six months ended June 30, 2015 increased by able to maintain current operations and will prudently consider 6% to HK$246 million from HK$232 million a year ago, with the potential projects within its cash level and appropriate leverage. margin maintained at 16%. For more information about the performance of PCPD, please As at June 30, 2015, the Solutions business had secured orders refer to its 2015 interim results announcement released with a value of HK$5,260 million. on August 5, 2015.
PCCW interim report 2015 15 MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)
Other Businesses Eliminations Other Businesses primarily comprised the wireless broadband Eliminations for the six months ended June 30, 2015 were business in the United Kingdom and corporate support functions. HK$1,106 million (June 30, 2014: HK$1,044 million). Revenue from Other Businesses was HK$25 million for the six Eliminations mainly represented eliminations of intra-group sale months ended June 30, 2015 (June 30, 2014: HK$18 million), and transfer of rights to use certain equipment and assets in the while the cost of the Group’s Other Businesses was ordinary course of business on an arm’s length basis. HK$324 million (June 30, 2014: HK$301 million).
Costs Cost of Sales
For the six months ended June 30, December 31, June 30, Better/ HK$ million 2014 2014 2015 (Worse) y-o-y
The Group (excluding PCPD) 6,730 8,340 8,003 (19)% PCPD 52 29 24 54%
Group Total 6,782 8,369 8,027 (18)%
The Group’s consolidated total cost of sales for the six months EBITDA1 ended June 30, 2015 increased by 18% year-on-year to Benefiting from the robust performance of HKT’s business, core HK$8,027 million. This comprised a 19% increase in cost of sales EBITDA for the six months ended June 30, 2015 increased by for the core business which was in line with the increase in core 30% year-on-year to HK$5,784 million representing a stable revenue and lower cost of sales for PCPD. margin of 32%. Consolidated EBITDA increased by 30% year-on-year to HK$5,683 million for the period representing a General and Administrative Expenses margin of 31%. During the period, operating costs before depreciation, amortization, and (loss)/gain on disposal of property, plant and Interest Income and Finance Costs equipment, net, increased by 25% year-on-year to Interest income for the six months ended June 30, 2015 was HK$4,372 million due largely to the enlarged business scale HK$35 million and finance costs increased by 33% year-on-year of HKT following the CSL acquisition as well as investments in to HK$764 million due to the incurrence of interest on the resources to support the new initiatives in OTT and free TV for borrowings raised to finance the CSL acquisition and the Media and expansion of business in China for Solutions. recognition of additional finance costs associated with the Operating costs to revenue ratio was stable at 24%. spectrum license fees arising from the CSL acquisition. As a result, net finance costs increased by 38% year-on-year to Depreciation and amortization expenses increased by 16% HK$729 million for the six months ended June 30, 2015. year-on-year to HK$2,930 million for the six months ended June 30, 2015, which reflected higher customer acquisition costs Income Tax in the prior year due to the enlarged business scale following the Income tax expenses for the six months ended June 30, 2015 CSL acquisition. was HK$209 million, as compared to HK$385 million a year ago, representing an effective tax rate of 10% for the period. As a result, general and administrative expenses increased by The decrease in the tax expenses is mainly due to recognition 21% year-on-year to HK$7,298 million for the six months ended of deferred income tax assets resulting from certain loss-making June 30, 2015. companies turning profitable and prior year’s provision of overseas tax from the disposition of an overseas subsidiary.
16 PCCW interim report 2015 Non-controlling Interests CREDIT RATINGS OF HONG KONG Non-controlling interests were HK$822 million for the six months TELECOMMUNICATIONS (HKT) LIMITED ended June 30, 2015 (June 30, 2014: HK$583 million), As at June 30, 2015, Hong Kong Telecommunications (HKT) which primarily represented the net profit attributable to the Limited, an indirect non-wholly owned subsidiary of the Company, non-controlling shareholders of HKT and PCPD. had investment grade ratings with Moody’s Investors Service (Baa2) and Standard & Poor’s Ratings Services (BBB). Consolidated Profit Attributable to Equity Holders of the Company CAPITAL EXPENDITURE3 Consolidated profit attributable to equity holders of the Company Group capital expenditure for the six months ended June 30, 2015 for the six months ended June 30, 2015 increased by 1% was HK$1,548 million (June 30, 2014: HK$1,469 million), of which year-on-year to HK$1,070 million (June 30, 2014: HK$1,058 million). HKT accounted for about 85% for the period (June 30, 2014: 78%). A significant proportion of the capital investments made by the LIQUIDITY AND CAPITAL RESOURCES Group in the first six months of 2015 was attributable to the network The Group actively and regularly reviews and manages its capital integration work for the Mobile business as well as to satisfy demand structure to maintain a balance between shareholder return and for our high speed broadband fiber services and international voice a sound capital position. Adjustments are made, when necessary, and data connectivity services. The remainder of the investments to maintain an optimal capital structure in light of changes in was to expand the data center capacity of the Solutions business economic conditions and to reduce the cost of capital. and to upgrade the broadcasting equipment for the Media business. Capital expenditure for the Solutions business tapered down in the During the first half of 2015, HKT took advantage of the favorable first six months of 2015 compared to the same period in 2014 as interest rate environment and raised a total of approximately we are close to completing the data center investment cycle that US$1,013 million through the issuance of US$300 million in commenced almost two years ago. 15-year, zero coupon guaranteed notes, US$500 million in 10-year, 3.625% guaranteed notes and €200 million in The Group will continue to invest in its delivery platform and 12-year, 1.65% guaranteed notes. During this period, PCCW networks taking into account the prevailing market conditions, also raised US$100 million through the issuance of 15-year, zero and using assessment criteria including internal rate of return, net coupon guaranteed notes. The use of proceeds was for general present value and payback period. corporate purposes including the refinancing of outstanding debt. The Group’s gross debt2 increased to HK$42,946 million as at June 30, 2015 (December 31, 2014: HK$41,957 million). Cash and cash equivalents totaled HK$6,567 million as at June 30, 2015 (December 31, 2014: HK$7,943 million).
The Group’s gross debt2 to total assets was 58% as at June 30, 2015 (December 31, 2014: 57%).
As at July 31, 2015, the Group had a total of HK$38,146 million in committed bank loan facilities available for liquidity management, of which HK$14,217 million remained undrawn. Of these committed bank loan facilities, HKT accounted for HK$27,147 million, of which HK$6,003 million remained undrawn.
PCCW interim report 2015 17 MANAGEMENT’S DISCUSSION AND ANALYSIS (CONTINUED)
HEDGING CONTINGENT LIABILITIES Market risk arises from foreign currency and interest rate exposure related to cash investments and borrowings. As a matter As at As at of policy, the Group continues to manage the market risk directly December 31, June 30, relating to its operations and financing and does not undertake HK$ million 2014 2015 any speculative derivative trading activities. The Group determines (Audited) (Unaudited) appropriate risk management activities with the aim of prudently managing the market risk associated with transactions undertaken Performance guarantees 2,338 2,369 in the normal course of the Group’s business. All treasury risk Tender guarantees 52 52 management activities are carried out in accordance with the Others 99 89
Group’s policies and guidelines, which are reviewed on a regular basis. 2,489 2,510
More than three quarters of the Group’s consolidated revenue and The Group is subject to certain corporate guarantee obligations costs are denominated in Hong Kong dollars. For those operations to guarantee performance of its subsidiaries in the normal course with revenues denominated in foreign currencies, the related of their businesses. The amount of liabilities arising from such costs and expenses are usually denominated in the same foreign obligations, if any, cannot be ascertained but the directors are of currencies and hence provide a natural hedge against each other. the opinion that any resulting liability would not materially affect Therefore, the Group is not exposed to significant foreign currency the financial position of the Group. fluctuation risk from operations. HUMAN RESOURCES As for financing, a significant portion of the Group’s debt is The Group had over 23,300 employees as at June 30, 2015 denominated in foreign currency including United States dollars. (June 30, 2014: 23,000) located in over 40 countries and cities. Accordingly, the Group has entered into forward and swap About 64% of these employees work in Hong Kong and the others contracts in order to manage its exposure to adverse fluctuations are based mainly in mainland China and the Philippines. in foreign currency exchange rates and interest rates. These The Group has established incentive bonus schemes designed to instruments are executed with creditworthy financial institutions. motivate and reward employees at all levels to achieve the Group’s As at June 30, 2015, all forward contracts and cross currency business performance targets. Payment of bonuses is generally interest rate swap contracts were designated as cash flow based on achievement of revenue, EBITDA and free cash flow hedges and/or fair value hedges for the Group’s foreign currency targets for the Group as a whole and for each of the individual denominated short-term and long-term borrowings. business units and employees.
As a result, the Group’s operational and financial risks are INTERIM DIVIDEND considered minimal. The Board has resolved to declare an interim dividend of 7.96 HK cents (June 30, 2014: 6.99 HK cents) per ordinary share CHARGE ON ASSETS for the six months ended June 30, 2015 to shareholders whose As at June 30, 2015, certain assets of the Group with an names appear on the register of members of the Company on aggregate carrying value of HK$2,233 million Thursday, August 27, 2015. The interim dividend will be payable (December 31, 2014: HK$2,050 million) and performance in cash with an option to eligible shareholders to participate in guarantee of approximately HK$162 million a scrip dividend alternative (the “2015 Interim Scrip Dividend (December 31, 2014: HK$166 million) in relation to the Scheme”). The 2015 Interim Scrip Dividend Scheme is conditional construction of a Premium Grade A office building in Jakarta, upon The Stock Exchange of Hong Kong Limited granting the Indonesia were pledged to secure certain bank loan facilities of listing of and permission to deal in the new shares to be issued the Group. under the 2015 Interim Scrip Dividend Scheme. Full details of the 2015 Interim Scrip Dividend Scheme will be set out in a circular to be despatched to shareholders on or around Monday, September 7, 2015.
18 PCCW interim report 2015 CONSOLIDATED INCOME STATEMENT For the six months ended June 30, 2015
In HK$ million (except for earnings per share) Note(s) 2014 2015 (Unaudited) (Unaudited)
Revenue 2 14,664 18,082 Cost of sales (6,782) (8,027) General and administrative expenses (6,025) (7,298) Other gains, net 3 688 60 Interest income 45 35 Finance costs (573) (764) Share of results of associates (5) 19 Share of results of joint ventures 14 (6)
Profit before income tax 2, 4 2,026 2,101 Income tax 5 (385) (209)
Profit for the period 1,641 1,892
Attributable to: Equity holders of the Company 1,058 1,070 Non-controlling interests 583 822
Profit for the period 1,641 1,892
Earnings per share 7 Basic 14.57 cents 14.39 cents
Diluted 14.55 cents 14.36 cents
The notes on pages 26 to 46 form an integral part of this unaudited condensed consolidated interim financial information.
PCCW interim report 2015 19 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the six months ended June 30, 2015
In HK$ million 2014 2015 (Unaudited) (Unaudited)
Profit for the period 1,641 1,892
Other comprehensive income/(loss) Items that have been reclassified or may be reclassified subsequently to income statement: Exchange differences on translating foreign operations (231) (180) Available-for-sale financial assets: – changes in fair value (16) (59) Cash flow hedges: – effective portion of changes in fair value 5 (168) – transfer from equity to income statement – (36)
Other comprehensive loss for the period (242) (443)
Total comprehensive income for the period 1,399 1,449
Attributable to: Equity holders of the Company 854 725 Non-controlling interests 545 724
Total comprehensive income for the period 1,399 1,449
The notes on pages 26 to 46 form an integral part of this unaudited condensed consolidated interim financial information.
20 PCCW interim report 2015 CONSOLIDATED AND COMPANY STATEMENTS OF FINANCIAL POSITION As at June 30, 2015
In HK$ million The Group The Company As at As at December 31, June 30, December 31, June 30, Note 2014 2015 2014 2015 (Audited) (Unaudited) (Audited) (Unaudited)
ASSETS AND LIABILITIES
Non-current assets Property, plant and equipment 17,337 17,878 – – Investment properties 1,878 1,910 – – Interests in leasehold land 464 453 – – Properties held for/under development 895 875 – – Goodwill 17,075 18,201 – – Intangible assets 10,195 10,590 – – Interests in subsidiaries – – 17,072 17,072 Interests in associates 687 731 – – Interests in joint ventures 497 498 – – Held-to-maturity investments 1 – – – Available-for-sale financial assets 754 736 – – Derivative financial instruments – 90 – – Deferred income tax assets 1,059 1,151 – – Other non-current assets 806 782 – –
51,648 53,895 17,072 17,072
Current assets Amounts due from subsidiaries – – 16,484 17,881 Sales proceeds held in stakeholders’ accounts 528 523 – – Restricted cash 1,022 96 – – Prepayments, deposits and other current assets 6,429 6,603 38 24 Inventories 801 1,006 – – Amounts due from related companies 95 114 – – Derivative financial instruments 49 97 – – Trade receivables, net 8 4,497 4,792 – – Tax recoverable 27 25 – – Short-term deposits – 350 – – Cash and cash equivalents 7,943 6,567 1,093 998
21,391 20,173 17,615 18,903
Current liabilities Short-term borrowings 10 (4,823) (11,065) (946) – Trade payables 9 (2,331) (2,913) – – Accruals and other payables (6,787) (6,080) (11) (10) Amount payable to the Government under the Cyberport Project Agreement (522) (322) – – Carrier licence fee liabilities (429) (445) – – Amounts due to related companies (98) (70) – – Advances from customers (2,155) (2,183) – – Current income tax liabilities (1,873) (1,618) – –
(19,018) (24,696) (957) (10)
PCCW interim report 2015 21 CONSOLIDATED AND COMPANY STATEMENTS OF FINANCIAL POSITION (CONTINUED) As at June 30, 2015
In HK$ million The Group The Company As at As at December 31, June 30, December 31, June 30, Note 2014 2015 2014 2015 (Audited) (Unaudited) (Audited) (Unaudited)
Non-current liabilities Long-term borrowings 10 (36,494) (31,154) (1,778) (2,697) Amounts due to subsidiaries – – (2,167) (2,934) Derivative financial instruments (217) (478) (117) (159) Deferred income tax liabilities (2,501) (2,702) – – Deferred income (1,033) (960) – – Defined benefit liability (116) (117) – – Carrier licence fee liabilities (949) (921) – – Other long-term liabilities (342) (441) – –
(41,652) (36,773) (4,062) (5,790)
Net assets 12,369 12,599 29,668 30,175
CAPITAL AND RESERVES
Share capital 11 11,720 12,209 11,720 12,209 Other reserves (1,563) (1,877) 17,948 17,966
Equity attributable to equity holders of the Company 10,157 10,332 29,668 30,175 Non-controlling interests 2,212 2,267 – –
Total equity 12,369 12,599 29,668 30,175
The notes on pages 26 to 46 form an integral part of this unaudited condensed consolidated interim financial information.
22 PCCW interim report 2015 CONSOLIDATED AND COMPANY STATEMENTS OF CHANGES IN EQUITY For the six months ended June 30, 2015
In HK$ million The Group The Company 2014 2014 (Unaudited) (Unaudited)
Non- controlling Total Total Attributable to equity holders of the Company interests equity equity
Available- Employee for-sale Special Capital share-based Currency financial Share Share capital redemption Treasury compensation translation Hedging assets Other Accumulated capital premium reserve reserve stock reserve reserve reserve reserve reserve losses Total
At January 1, 2014 1,818 9,143 5,947 3 (74) 60 921 97 327 (31) (9,024) 9,187 (554) 8,633 26,845
Total comprehensive income/(loss) for the period Profit for the period – – – – – – – – – – 1,058 1,058 583 1,641 2,646
Other comprehensive (loss)/income Items that have been reclassified or may be reclassified subsequently to income statement: Exchange differences on translating foreign operations – – – – – – (213) – – – – (213) (18) (231) – Available-for-sale financial assets: – changes in fair value – – – – – – – – (4) – – (4) (12) (16) – Cash flow hedges: – effective portion of changes in fair value–––––––9–––9(4)516 – transfer from equity to income statement – – – – – – – 4 – – – 4 (4) – –
Other comprehensive (loss)/income – – – – – – (213) 13 (4) – – (204) (38) (242) 16
Total comprehensive income/(loss) for the period – – – – – – (213) 13 (4) – 1,058 854 545 1,399 2,662
Transactions with equity holders Purchase of shares of PCCW Limited (“PCCW Shares”) under share award scheme – – – – (4) – – – – – – (4) – (4) – Employee share-based compensation – – – – – 22 – – – – – 22 3 25 – Vesting of PCCW Shares and share stapled units of HKT Trust and HKT Limited (“Share Stapled Units”) under share award schemes – – – – 24 (28) – – – – 5 1 (1) – – Dividend for Share Stapled Units granted under share award schemes – – – – – (1) – – – – – (1) – (1) – Transition to no-par value regime on March 3, 2014 (note 11(c)) 9,146 (9,143) – (3) – – – – – – – – – – – PCCW Shares issued in lieu of cash dividends 474 – – – – – – – – – – 474 – 474 474 Final dividend paid in respect of previous year (note 6(b)) – – (1,006) – – (3) – – – – – (1,009) – (1,009) (1,009) Dividend declared and paid to non-controlling shareholders of a subsidiary – – – – – – – – – – – – (572) (572) –
Total contributions by and distributions to equity holders 9,620 (9,143) (1,006) (3) 20 (10) – – – – 5 (517) (570) (1,087) (535)
Contribution from non-controlling shareholders of a subsidiary – – – – – – – – – – – – 6 6 – Acquisition of a subsidiary – – – – – – – – – – – – 36 36 – Change in ownership interests in a subsidiary without change of control – – – – – – – – – – 24 24 37 61 –
Total changes in ownership interests in subsidiaries that do not result in a loss of control – – – – – – – – – – 24 24 79 103 –
Total transactions with equity holders 9,620 (9,143) (1,006) (3) 20 (10) – – – – 29 (493) (491) (984) (535)
At June 30, 2014 11,438 – 4,941 – (54) 50 708 110 323 (31) (7,937) 9,548 (500) 9,048 28,972
PCCW interim report 2015 23 CONSOLIDATED AND COMPANY STATEMENTS OF CHANGES IN EQUITY (CONTINUED) For the six months ended June 30, 2015
In HK$ million The Group The Company 2015 2015 (Unaudited) (Unaudited)
Non- controlling Total Total Attributable to equity holders of the Company interests equity equity
Available- Employee for-sale Special share-based Currency financial Share capital Treasury compensation translation Hedging assets Other Accumulated capital reserve stock reserve reserve reserve reserve reserve losses Total
At January 1, 2015 11,720 4,426 (45) 89 (605) 119 279 (113) (5,713) 10,157 2,212 12,369 29,668
Total comprehensive income/(loss) for the period Profit for the period ––––––––1,0701,0708221,8921,045
Other comprehensive loss Items that have been reclassified or may be reclassified subsequently to income statement: Exchange differences on translating foreign operations – – – – (158) – – – – (158) (22) (180) – Available-for-sale financial assets: – changes in fair value ––––––(46)––(46)(13)(59)– Cash flow hedges: – effective portion of changes in fair value – – – – – (122) – – – (122) (46) (168) (42) – transfer from equity to income statement – – – – – (19) – – – (19) (17) (36) –
Other comprehensive loss – – – – (158) (141) (46) – – (345) (98) (443) (42)
Total comprehensive income/(loss) for the period – – – – (158) (141) (46) – 1,070 725 724 1,449 1,003
Transactions with equity holders Purchase of PCCW Shares under share award scheme ––(29)––––––(29)–(29)– Purchase of Share Stapled Units under share award schemes ––––––––(57)(57)(37)(94)– Employee share-based compensation –––36–––––361147– Vesting of PCCW Shares and Share Stapled Units under share award schemes ––22(60)––––35(3)3–– Dividend for Share Stapled Units granted under share award schemes –––(1)–––––(1)(1)(2)– PCCW Shares issued in lieu of cash dividends 489––––––––489–489489 Final dividend paid in respect of previous year (note 6(b)) – (983) – (2) – – – – – (985) – (985) (985) Dividend declared and paid to non-controlling shareholders of subsidiaries ––––––––––(664) (664) –
Total contributions by and distributions to equity holders 489 (983) (7) (27) – – – – (22) (550) (688) (1,238) (496)
Acquisition of subsidiaries ––––––––––1919–
Total changes in ownership interests in subsidiaries that do not result in a loss of control ––––––––––1919–
Total transactions with equity holders 489 (983) (7) (27) ––––(22)(550) (669) (1,219) (496)
At June 30, 2015 12,209 3,443 (52) 62 (763) (22) 233 (113) (4,665) 10,332 2,267 12,599 30,175
The notes on pages 26 to 46 form an integral part of this unaudited condensed consolidated interim financial information.
24 PCCW interim report 2015 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS For the six months ended June 30, 2015
In HK$ million 2014 2015 (Unaudited) (Unaudited)
Net cash generated from operating activities 3,953 5,056
Investing activities Proceeds from proposed disposal of assets and liabilities held for sale 3,238 – Net outflow of cash and cash equivalents in respect of business combinations (18,757) (1,295) Other investing activities (2,949) (4,257)
Net cash used in investing activities (18,468) (5,552)
Financing activities New borrowings raised, net 51,718 9,761 Other financing activities (including repayment of borrowings) (33,608) (10,606)
Net cash generated from/(used in) financing activities 18,110 (845)
Net increase/(decrease) in cash and cash equivalents 3,595 (1,341) Exchange differences (38) (35) Cash and cash equivalents at January 1, 5,509 7,943
Cash and cash equivalents at June 30, 9,066 6,567
Analysis of the balance of cash and cash equivalents: Cash and bank balances 10,098 7,013 Less: Short-term deposits – (350) Less: Restricted cash (1,032) (96)
9,066 6,567 Less: Cash and cash equivalents of disposal group classified as held for sale (495) –
8,571 6,567
The notes on pages 26 to 46 form an integral part of this unaudited condensed consolidated interim financial information.
PCCW interim report 2015 25 NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION For the six months ended June 30, 2015
1 BASIS OF PREPARATION The unaudited condensed consolidated interim financial information of PCCW Limited (the “Company”) and its subsidiaries (collectively the “Group”) has been prepared in accordance with the applicable disclosure requirements of Appendix 16 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and Hong Kong Accounting Standard (“HKAS”) 34 ‘Interim Financial Reporting’ issued by the Hong Kong Institute of Certified Public Accountants (“HKICPA”). This unaudited condensed consolidated interim financial information should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2014.
This unaudited condensed consolidated interim financial information is presented in Hong Kong dollars, unless otherwise stated. This unaudited condensed consolidated interim financial information was approved for issue on August 6, 2015.
The unaudited condensed consolidated interim financial information has been reviewed by the Company’s Audit Committee and, in accordance with Hong Kong Standard on Review Engagements 2410 ‘Review of Interim Financial Information Performed by the Independent Auditor of the Entity’ issued by the HKICPA, by the Company’s independent auditor.
The preparation of the unaudited condensed consolidated interim financial information in conformity with HKAS 34 requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses on a year-to-date basis. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results.
The accounting policies, basis of presentation and methods of computation used in preparing this unaudited condensed consolidated interim financial information are consistent with those followed in preparing the Group’s annual consolidated financial statements for the year ended December 31, 2014, except for the adoption of the following new, revised or amended Hong Kong Financial Reporting Standards (“HKFRSs”), HKASs and Interpretations (collectively “new HKFRSs”) which are effective for accounting periods beginning on or after January 1, 2015 as described below.
The following new HKFRSs are mandatory for the first time for the financial year beginning January 1, 2015, but have had no material effect on the Group’s reported results and financial position for the current and prior accounting periods:
– HKAS 19 (2011) (Amendment), Defined Benefit Plans: Employee Contributions. – Annual Improvements to 2010-2012 Cycle published in January 2014 by HKICPA. – Annual Improvements to 2011-2013 Cycle published in January 2014 by HKICPA.
The Group has not adopted any new HKFRSs that are not yet effective for the current accounting period.
26 PCCW interim report 2015 2 SEGMENT INFORMATION The chief operating decision-maker (the “CODM”) is the Group’s senior executive management. The CODM reviews the Group’s internal reporting in order to assess performance and allocate resources and the segment information is reported below in accordance with this internal reporting.
The CODM considers the business from the product perspective and assesses the performance of the following segments:
– HKT Limited (“HKT”) is Hong Kong’s premier telecommunications service provider. The principal activities of HKT and its subsidiaries are the provision of telecommunications and related services which include local telephony, local data and broadband, international telecommunications, mobile, customer premises equipment sale, outsourcing, consulting and contact centers. It operates primarily in Hong Kong, and also serves customers in mainland China and other parts of the world.
– Media Business includes interactive pay-TV service, Internet portal multimedia entertainment platform and directories operations in Hong Kong, mainland China and other parts of the world.
– Solutions Business offers Information and Communications Technologies services and solutions in Hong Kong, Macau and mainland China.
– Pacific Century Premium Developments Limited (“PCPD”) covers the Group’s property portfolio in Hong Kong, mainland China and elsewhere in Asia.
– Other Businesses include the Group’s wireless broadband business in the United Kingdom and all corporate support functions.
The CODM assesses the performance of the operating segments based on a measure of adjusted earnings before interest, tax, depreciation and amortization (“EBITDA”). EBITDA represents earnings before interest income, finance costs, income tax, depreciation of property, plant and equipment, amortization of land lease premium and intangible assets, gain/loss on disposal of property, plant and equipment, investment properties, interests in leasehold land and intangible assets, net other gains/losses, losses on property, plant and equipment, restructuring costs, impairment losses on goodwill, tangible and intangible assets and interests in associates and joint ventures, and the Group’s share of results of associates and joint ventures.
Segment revenue, expense and segment performance include transactions between segments. Inter-segment pricing is based on similar terms to those available to other external parties for similar services. The revenue from external parties reported to the CODM is measured in a manner consistent with that in the consolidated income statement.
PCCW interim report 2015 27 NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (CONTINUED) For the six months ended June 30, 2015
2 SEGMENT INFORMATION (CONTINUED) Information regarding the Group’s reportable segments as provided to the Group’s CODM is set out below:
In HK$ million For the six months ended June 30, 2014 (Unaudited)
Media Solutions Other HKT Business Business Businesses PCPD Eliminations Consolidated
REVENUE External revenue 12,370 965 1,097 18 214 – 14,664 Inter-segment revenue (note a) 150 522 362 – 10 (1,044) –
Total revenue 12,520 1,487 1,459 18 224 (1,044) 14,664
RESULTS EBITDA 4,425 180 232 (301) (81) (79) 4,376
In HK$ million For the six months ended June 30, 2015 (Unaudited)
Media Solutions Other HKT Business Business Businesses PCPD Eliminations Consolidated
REVENUE External revenue 15,800 1,046 1,116 22 98 – 18,082 Inter-segment revenue (note a) 174 544 384 3 1 (1,106) –
Total revenue 15,974 1,590 1,500 25 99 (1,106) 18,082
RESULTS EBITDA 5,770 182 246 (324) (101) (90) 5,683
a. The inter-segment revenue included certain sales by respective business segment to external customers through the other segment’s billing platform.
28 PCCW interim report 2015 2 SEGMENT INFORMATION (CONTINUED) A reconciliation of total segment EBITDA to profit before income tax is provided as follows:
In HK$ million Six months ended June 30, June 30, 2014 2015 (Unaudited) (Unaudited)
Total segment EBITDA 4,376 5,683 (Loss)/Gain on disposal of property, plant and equipment, net (2) 4 Depreciation and amortization (2,517) (2,930) Other gains, net 688 60 Interest income 45 35 Finance costs (573) (764) Share of results of associates and joint ventures 9 13
Profit before income tax 2,026 2,101
3 OTHER GAINS, NET
In HK$ million Six months ended June 30, June 30, 2014 2015 (Unaudited) (Unaudited)
Fair value gains on investment properties 654 – Gain on remeasuring an available-for-sale investment upon a step acquisition – 29 Net gains on cash flow hedging instruments transferred from equity 1 1 Net gains on fair value hedging instruments 23 24 Net gains from return of investments in available-for-sale financial assets 10 – Net gains on disposal of available-for-sale financial assets – 9 Others – (3)
688 60
4 PROFIT BEFORE INCOME TAX Profit before income tax is stated after charging the following:
In HK$ million Six months ended June 30, June 30, 2014 2015 (Unaudited) (Unaudited)
Charging: Cost of inventories sold 1,078 1,912 Cost of sales, excluding inventories sold 5,704 6,115 Depreciation of property, plant and equipment 1,236 1,057 Amortization of intangible assets 1,270 1,862 Amortization of land lease premium – interests in leasehold land 11 11 Finance costs on borrowings 530 703 Staff costs 1,435 1,778
PCCW interim report 2015 29 NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (CONTINUED) For the six months ended June 30, 2015
5 INCOME TAX
In HK$ million Six months ended June 30, June 30, 2014 2015 (Unaudited) (Unaudited)
Current income tax: Hong Kong profits tax 29 273 Overseas tax 51 13 Movement of deferred income tax 305 (77)
385 209
Hong Kong profits tax has been provided at the rate of 16.5% (2014: 16.5%) on the estimated assessable profits for the period. Overseas tax has been calculated on the estimated assessable profits for the period at the rates prevailing in the respective jurisdictions.
6 DIVIDENDS a. Dividend attributable to the interim period
In HK$ million Six months ended June 30, June 30, 2014 2015 (Unaudited) (Unaudited)
Interim dividend declared after the interim period of 7.96 HK cents (2014: 6.99 HK cents) per ordinary share 517 601
At a meeting held on August 6, 2015, the directors declared an interim dividend of 7.96 HK cents per ordinary share for the year ending December 31, 2015. This interim dividend is not reflected as a dividend payable in this unaudited condensed consolidated interim financial information.
The 2015 interim dividend will be payable in cash with a scrip dividend alternative subject to The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) granting the listing of and permission to deal in the new PCCW Shares to be issued pursuant thereto.
b. Dividends approved and paid during the interim period
In HK$ million Six months ended June 30, June 30, 2014 2015 (Unaudited) (Unaudited)
Final dividend in respect of the previous financial year, approved and paid during the interim period of 13.21 HK cents (2014: 13.85 HK cents) per ordinary share (note i) 1,009 985 Less: dividend for PCCW Shares held by share award schemes (3) (2)
1,006 983
i. The 2014 final dividend payable in cash with a scrip dividend alternative was approved by the shareholders at the annual general meeting and the listing of and permission to deal in the new PCCW Shares issued pursuant thereto was granted by the Stock Exchange. Please refer to note 11(a) for the details of share capital issued and allotted during the six months ended June 30, 2015.
30 PCCW interim report 2015 7 EARNINGS PER SHARE The calculations of basic and diluted earnings per share are based on the following data:
Six months ended June 30, June 30, 2014 2015 (Unaudited) (Unaudited)
Earnings (in HK$ million) Earnings for the purposes of basic and diluted earnings per share 1,058 1,070
Number of shares Weighted average number of ordinary shares 7,282,662,873 7,456,334,207 Effect of PCCW Shares held under the Company’s share award schemes (19,497,262) (18,814,223)
Weighted average number of ordinary shares for the purpose of basic earnings per share 7,263,165,611 7,437,519,984 Effect of PCCW Shares awarded under the Company’s share award schemes 7,768,057 11,915,439
Weighted average number of ordinary shares for the purpose of diluted earnings per share 7,270,933,668 7,449,435,423
8 TRADE RECEIVABLES, NET The aging of trade receivables based on the date of invoice is set out below:
In HK$ million As at December 31, June 30, 2014 2015 (Audited) (Unaudited)
0–30 days 2,479 2,432 31–60 days 640 782 61–90 days 289 246 91–120 days 190 312 Over 120 days 1,133 1,283
4,731 5,055 Less: Impairment loss for doubtful debts (234) (263)
4,497 4,792
Included in trade receivables, net were amounts due from related parties of HK$39 million and HK$76 million as at June 30, 2015 and December 31, 2014 respectively.
PCCW interim report 2015 31 NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (CONTINUED) For the six months ended June 30, 2015
8 TRADE RECEIVABLES, NET (CONTINUED) Trade receivables have a normal credit period ranging up to 30 days from the date of invoice unless there is a separate mutual agreement on extension of the credit period. The Group maintains a well-defined credit policy and individual credit evaluations are performed on all customers requiring credit over a certain amount. These evaluations focus on the customer’s past history of making payments when due and current ability to pay, and take into account information specific to the customer as well as pertaining to the economic environment in which the customer operates. Debtors who have overdue payables are requested to settle all outstanding balances before any further credit is granted.
9 TRADE PAYABLES The aging of trade payables based on the date of invoice is set out below:
In HK$ million As at December 31, June 30, 2014 2015 (Audited) (Unaudited)
0–30 days 1,180 1,781 31–60 days 148 63 61–90 days 40 49 91–120 days 59 35 Over 120 days 904 985
2,331 2,913
Included in trade payables were amounts due to related parties of HK$81 million and HK$22 million as at June 30, 2015 and December 31, 2014 respectively.
10 SHORT-TERM AND LONG-TERM BORROWINGS a. During the six months ended June 30, 2015, certain bank borrowings of approximately HK$3,266 million and guaranteed notes of US$500 million (approximately HK$3,876 million) have been reclassified from long-term liabilities to short-term liabilities as their maturity dates fall due within the next twelve-month period. As at June 30, 2015, the Group had a total cash and cash equivalents of HK$6,567 million and undrawn banking facilities of approximately HK$18,325 million. In July 2015, the Group had reduced its short-term borrowings by refinancing its maturing guaranteed notes of US$500 million (approximately HK$3,876 million) with the Group’s long-term borrowings.
b. US$300 million zero coupon guaranteed notes due 2030 On January 15, 2015, HKT Capital No. 1 Limited, an indirect non-wholly owned subsidiary of the Company, issued US$300 million (approximately HK$2,326 million) zero coupon guaranteed notes due 2030, which are listed on the Taipei Exchange (previously known as the GreTai Securities Market) in Taiwan, China. The notes are irrevocably and unconditionally guaranteed by HKT Group Holdings Limited (“HKTGH”) and Hong Kong Telecommunications (HKT) Limited (“HKTL”), both being indirect non-wholly owned subsidiaries of the Company, and rank pari passu with all other outstanding unsecured and unsubordinated obligations of HKTGH and HKTL.
32 PCCW interim report 2015 10 SHORT-TERM AND LONG-TERM BORROWINGS (CONTINUED) c. US$500 million 3.625% guaranteed notes due 2025 On April 2, 2015, HKT Capital No. 2 Limited, an indirect non-wholly owned subsidiary of the Company, issued US$500 million (approximately HK$3,876 million) 3.625% guaranteed notes due 2025, which are listed on the Singapore Exchange Securities Trading Limited. The notes are irrevocably and unconditionally guaranteed by HKTGH and HKTL and rank pari passu with all other outstanding unsecured and unsubordinated obligations of HKTGH and HKTL.
d. €200 million 1.65% guaranteed notes due 2027 On April 10, 2015, HKT Capital No. 3 Limited, an indirect non-wholly owned subsidiary of the Company, issued €200 million (approximately HK$1,729 million) 1.65% guaranteed notes due 2027, which are listed on the Singapore Exchange Securities Trading Limited. The notes are irrevocably and unconditionally guaranteed by HKTGH and HKTL and rank pari passu with all other outstanding unsecured and unsubordinated obligations of HKTGH and HKTL.
e. US$100 million zero coupon guaranteed notes due 2030 On May 20, 2015, PCCW Capital No. 5 Limited, a direct wholly-owned subsidiary of the Company, issued US$100 million (approximately HK$775 million) zero coupon guaranteed notes due 2030, which are listed on the Taipei Exchange in Taiwan, China. The notes are irrevocably and unconditionally guaranteed by the Company and rank pari passu with all other outstanding unsecured and unsubordinated obligations of the Company.
11 SHARE CAPITAL
Six months ended June 30, 2014 2015 Number of Number of shares Share capital shares Share capital (Unaudited) (Unaudited) (Unaudited) (Unaudited) HK$ million HK$ million
Issued and fully paid: As at January 1 7,272,294,654 1,818 7,453,177,661 11,720 PCCW Shares issued in lieu of cash dividends (note a) 114,240,694 474 96,011,595 489 PCCW Shares issued for share award scheme (note b) 10,000,000 – –– Transfer from share premium account and capital redemption reserve account upon transition to no-par value regime on March 3, 2014 (note c) – 9,146 ––
As at June 30 7,396,535,348 11,438 7,549,189,256 12,209
a. During the six months ended June 30, 2015, the Company issued and allotted 96,011,595 new fully paid shares (2014: 114,240,694 new fully paid shares) at HK$5.088 (2014: HK$4.148) per share to the shareholders who elected to receive PCCW Shares in lieu of cash for 2014 final dividend (2014: 2013 final dividend) pursuant to the scrip dividend scheme.
b. During the six months ended June 30, 2014, the Company issued and allotted 10,000,000 new fully paid shares at HK$0.01 per share pursuant to the share award scheme.
c. In accordance with the transitional provisions set out in section 37 of Schedule 11 to the new Hong Kong Companies Ordinance (Cap. 622), on March 3, 2014, any amount standing to the credit of the share premium account and the capital redemption reserve account has become part of the Company’s share capital.
PCCW interim report 2015 33 NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (CONTINUED) For the six months ended June 30, 2015
12 SHARE AWARD SCHEMES OF THE COMPANY AND SHARE STAPLED UNITS AWARD SCHEMES OF HKT Pursuant to the two share incentive award schemes of the Company, namely the Purchase Scheme and the Subscription Scheme (collectively the “PCCW Share Award Schemes”) and the two award schemes of HKT, namely the HKT Share Stapled Units Purchase Scheme and the HKT Share Stapled Units Subscription Scheme (collectively the “HKT Share Stapled Units Award Schemes”), the Company and HKT have awarded a number of PCCW Shares and Share Stapled Units to eligible employees of the Company and/or its subsidiaries during the six months ended June 30, 2015.
A summary of movements in the PCCW Shares and the Share Stapled Units held under the PCCW Share Award Schemes and the HKT Share Stapled Units Award Schemes are as follows:
Six months ended June 30, 2014 Number of Number of Share PCCW Shares Stapled Units (Unaudited) (Unaudited)
As at January 1, 2014 19,104,824 7,530,210 Purchase from the market by the trustee at average market price of HK$4.20 per PCCW Share 855,000 – Newly issued by the Company at issue price of HK$0.01 per PCCW Share 10,000,000 – PCCW Shares/Share Stapled Units vested (6,750,928) (1,775,845)
As at June 30, 2014 23,208,896 5,754,365
Six months ended June 30, 2015 Number of Number of Share PCCW Shares Stapled Units (Unaudited) (Unaudited)
As at January 1, 2015 21,116,787 6,173,068 Purchase from the market by the trustee at average market price of HK$4.98 per PCCW Share/HK$9.92 per Share Stapled Unit 5,837,000 9,517,000 PCCW Shares/Share Stapled Units vested (8,036,235) (5,823,265) Transfer to grantees in lieu of cash dividends (475) –
As at June 30, 2015 18,917,077 9,866,803
The average fair values of the PCCW Shares and the Share Stapled Units awarded during the six months ended June 30, 2015 at the dates of award are HK$5.35 (2014: HK$4.00) per PCCW Share and HK$10.30 (2014: HK$8.26) per Share Stapled Unit respectively, which are measured by the quoted market price of the PCCW Shares and the Share Stapled Units at the respective award dates respectively.
34 PCCW interim report 2015 13 CAPITAL COMMITMENTS
In HK$ million As at December 31, June 30, 2014 2015 (Audited) (Unaudited)
Authorized and contracted for 2,396 2,518 Authorized but not contracted for 1,288 881
3,684 3,399
Included in the capital commitments were commitments of HK$1,668 million and HK$1,813 million for the purchase of property, plant and equipment as at June 30, 2015 and December 31, 2014 respectively.
Additions of property, plant and equipment were HK$1,548 million and HK$1,469 million for the six months ended June 30, 2015 and 2014 respectively.
14 CONTINGENT LIABILITIES
In HK$ million As at December 31, June 30, 2014 2015 (Audited) (Unaudited)
Performance guarantees 2,338 2,369 Tender guarantees 52 52 Others 99 89
2,489 2,510
The Group is subject to certain corporate guarantee obligations to guarantee performance of its subsidiaries in the normal course of their businesses. The amount of liabilities arising from such obligations, if any, cannot be ascertained but the directors are of the opinion that any resulting liability would not materially affect the financial position of the Group.
PCCW interim report 2015 35 NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (CONTINUED) For the six months ended June 30, 2015
15 CHARGE ON ASSETS Security pledged for certain bank loan facilities includes:
In HK$ million As at December 31, June 30, 2014 2015 (Audited) (Unaudited)
Property, plant and equipment – 12 Investment properties 1,848 1,880 Intangible assets – 19 Prepayment, deposits and other current assets 182 184 Trade receivables – 66 Cash and cash equivalents 20 72
2,050 2,233
Performance guarantee of approximately HK$162 million in relation to the construction of a Premium Grade A office building in Jakarta, Indonesia was pledged for certain bank loan facilities as at June 30, 2015 (December 31, 2014: HK$166 million).
16 RELATED PARTY TRANSACTIONS During the period, the Group had the following significant transactions with related parties:
In HK$ million Six months ended June 30, June 30, Note 2014 2015 (Unaudited) (Unaudited)
Telecommunications service fees, facility management service charges and interest income received or receivable from joint ventures a 39 29 Consultancy service charges and interest income received or receivable from associates a 8 7 Telecommunications service fees and systems integration charges received or receivable from a substantial shareholder a 142 49 Telecommunications service fees, outsourcing fees and rental charges paid or payable to joint ventures a 173 136 Telecommunications service fees and facility management service charges paid or payable to a substantial shareholder a 64 92 Consideration paid or payable for the purchase of equipment from a joint venture a – 14 Key management compensation b 40 52
a. These transactions were carried out after negotiations between the Group and the related parties in the ordinary course of business and on the basis of estimated market value as determined by the directors. In respect of transactions for which the price or volume has not yet been agreed with the relevant related parties, the directors have determined the relevant amounts based on their best estimation.
36 PCCW interim report 2015 16 RELATED PARTY TRANSACTIONS (CONTINUED) b. Details of key management compensation
In HK$ million Six months ended June 30, June 30, 2014 2015 (Unaudited) (Unaudited)
Salaries and other short-term employee benefits 31 44 Share-based compensation 8 6 Post-employment benefits 1 2
40 52
17 FINANCIAL INSTRUMENTS a. Financial risk factors Exposures to credit, liquidity, and market risks (including foreign currency risk and interest rate risk) arise in the normal course of the Group’s business. The Group is also exposed to equity price risk arising from its equity investments in other entities. Exposures to these risks are controlled by the Group’s financial management policies and practices.
The unaudited condensed consolidated interim financial information does not include all financial risk management information and disclosures required in the annual consolidated financial statements; it should be read in conjunction with the annual consolidated financial statements for the year ended December 31, 2014. There have been no changes in any financial management policies and practices since December 31, 2014.
b. Estimation of fair values The tables below analyze financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:
– Quoted prices (unadjusted) in active markets for identical assets or liabilities (level 1). – Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (level 2). – Inputs for asset or liability that are not based on observable market data (level 3).
PCCW interim report 2015 37 NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (CONTINUED) For the six months ended June 30, 2015
17 FINANCIAL INSTRUMENTS (CONTINUED) b. Estimation of fair values (continued) The following table presents the Group’s financial instruments that are measured at fair value at December 31, 2014:
In HK$ million The Group As at December 31, 2014 (Audited) Level 1 Level 2 Level 3 Total
Assets Available-for-sale financial assets – Listed equity securities 104 – – 104 – Unlisted equity securities – – 650 650 Derivative financial instruments (current) – 49 – 49
Total assets 104 49 650 803
Liabilities Derivative financial instruments (non-current) – (217) – (217)
The following table presents the Group’s financial instruments that are measured at fair value at June 30, 2015:
In HK$ million The Group As at June 30, 2015 (Unaudited) Level 1 Level 2 Level 3 Total
Assets Available-for-sale financial assets – Listed equity securities 45––45 – Unlisted equity securities – – 691 691 Derivative financial instruments (non-current) –90–90 Derivative financial instruments (current) –97–97
Total assets 45 187 691 923
Liabilities Derivative financial instruments (non-current) – (478) – (478)
The following table presents the Company’s financial instruments that are measured at fair value at December 31, 2014 and June 30, 2015:
The Company In HK$ million Level 2 As at As at December 31, June 30, 2014 2015 (Audited) (Unaudited)
Liabilities Derivative financial instruments (non-current) (117) (159)
38 PCCW interim report 2015 17 FINANCIAL INSTRUMENTS (CONTINUED) b. Estimation of fair values (continued) The fair values of financial instruments traded in active markets are based on quoted market prices at the end of the reporting period. The quoted market price used for financial assets held by the Group included in level 1 is the current bid price. Instruments included in level 1 comprise primarily available-for-sale financial assets listed on Tokyo Stock Exchange, Inc. and the Alternative Investment Market operated by London Stock Exchange plc.
The fair values of financial instruments that are not traded in an active market are determined by using valuation techniques and making assumptions that are based on market conditions existing at the end of each reporting period. Instruments included in level 2 comprise cross currency swap contracts, currency call spread option and foreign exchange forward contracts.
Specific valuation techniques used to value financial instruments include:
– In measuring the swap transactions, the fair value is the net present value of the estimated future cash flows discounted at the market quoted swap rates.
– The fair value of currency call spread option is the dealer quoted price, taking into account of the spot and forward exchange rates that are quoted in an active market and the observable interest rates and yield curves and the implied volatility.
– The fair value of the foreign exchange forward contracts is calculated based on the prevailing market foreign currency exchange rates quoted for contracts with same notional amounts adjusted for maturity differences.
If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3. Instruments included in level 3 comprise available-for-sale financial assets for equity investments in several private companies.
For unlisted securities or financial assets without an active market, the Group establishes the fair value by using valuation techniques including the use of recent arm’s length transactions, reference to other instruments that are substantially the same, and discounted cash flow analysis, making maximum use of market inputs and relying as little as possible on entity-specific inputs. If none of the valuation techniques results in a reasonable estimate on the fair value, the investment is stated in the statement of financial position at cost less impairment losses.
The key assumptions adopted in the valuation models include market multiples, discount rates and growth rates which are based on historical pattern and industry trends of comparable companies. The fair values of these investments may differ significantly if there are material changes to the underlying assumptions applied in the relevant fair valuation models.
Key assumptions used for the valuations of these unlisted investments are:
– Market multiples (based on price earnings multiples or enterprise value/earnings before interest and tax multiples of comparable companies): 3 – 20 (December 31, 2014: 3 – 20) – Liquidity discount: 15% – 30% (December 31, 2014: 15% – 30%) – Market size discount: 15% – 70% (December 31, 2014: 15% – 70%) – Future growth rates: 10% – 50% (December 31, 2014: 10% – 50%)
There were no transfers of financial assets and liabilities between fair value hierarchy classifications during the six months ended June 30, 2015.
There were no changes in valuation techniques during the six months ended June 30, 2015.
PCCW interim report 2015 39 NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (CONTINUED) For the six months ended June 30, 2015
17 FINANCIAL INSTRUMENTS (CONTINUED) b. Estimation of fair values (continued) The following table presents the changes in level 3 instruments during the six months ended June 30, 2014 and 2015:
In HK$ million Available-for-sale financial assets – unlisted equity securities Six months ended June 30, 2014 2015 (Unaudited) (Unaudited)
At January 1 509 650 Additions 122 126 Return of investments (23) – Reclassification of equity interests upon step acquisition – (78) Disposals – (7)
At June 30 608 691
During the six months ended June 30, 2014 and 2015, there was no provision for impairment recognized in the consolidated income statement.
c. Group’s valuation process The Group’s finance department includes a team that performs the valuations of financial assets required for financial reporting purposes, including level 3 fair values. Material movements in valuations are reported to senior management immediately. Valuation results are reviewed by senior management at least on a semi-annual basis.
The main level 3 input used by the Group pertains to the use of recent arm’s length transactions, reference to portfolio statement, and reference to other listed instruments that are substantially the same, adjusted for the marketability discount on the Group’s investments. The higher the marketability discount, the lower the fair value.
d. Fair values of financial assets and liabilities measured at amortized cost All financial instruments are carried at amounts not materially different from their fair values as at December 31, 2014 and June 30, 2015 except as follows, with fair value calculated by quoted prices:
In HK$ million As at December 31, 2014 As at June 30, 2015 (Audited) (Unaudited) Carrying Fair Carrying Fair amount value amount value
Short-term borrowings (4,823) (4,909) (11,065) (11,119) Long-term borrowings (36,494) (37,059) (31,154) (31,569)
The fair values of short-term and long-term borrowings are the net present value of the estimated future cash flows discounted at the prevailing market rates. The fair values are within level 2 of the fair value hierarchy.
40 PCCW interim report 2015 18 BUSINESS COMBINATIONS a. Business combinations during the six months ended June 30, 2015 i. Acquisition of Vuclip, Inc. and its subsidiaries (together the “Vuclip Group”) During the six-month period ended June 30, 2015, the Group has acquired in stages an aggregate of approximately 94.8 per cent equity interests in Vuclip, Inc., a company incorporated in California, United States of America, and its subsidiaries for a total consideration of approximately HK$1,286 million. This amount has included the fair value of a contingent consideration of approximately HK$22 million, of which the Group is required to make payments totaling up to a maximum level of approximately HK$39 million if the businesses of Vuclip Group achieve certain financial milestones within a specified period. The purpose of the acquisition is to expedite the Group’s strategy of rolling out its over-the-top (“OTT”) video and music services both in the Asian region and globally. Vuclip, Inc. is a leading premium mobile video on demand service provider in emerging markets. Its strengths include its early and extensive penetration into emerging markets facilitated by the use of its patented Dynamic Adaptive Transcoding technology that can deliver high-quality video content across variable network conditions and across all mobile devices without buffering. Together, the Group Media business and Vuclip Group will develop a best of breed OTT platform that provides immediate access to the Group Media business’ premium Asian content set (including Korean, Japanese and Chinese content) across a much expanded audience base in the Asian continent and other regions.
The Group is required to recognize the acquired companies’ identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria at their fair values at the date when the Group obtains the majority stake and control of the acquired companies. As of the date of this unaudited condensed consolidated interim financial information, the purchase price allocation process is ongoing and has yet to be finalized. In the preparation of this unaudited condensed consolidated interim financial information, the Group has used the estimated fair values of the acquired assets and liabilities with the excess of the cost of acquisition over these estimated fair values being recorded as goodwill. This allocation of the purchase price to the acquired assets and liabilities is provisional and will be adjusted when the purchase price allocation is finalized. Had the purchase price allocation been completed, the fair values of the assets and liabilities acquired and the amount of goodwill to be recorded could be materially different from the amounts recognized. The values of assets and liabilities acquired and the resulting goodwill will be adjusted retrospectively upon the completion of the purchase price allocation.
(i) Details of net assets acquired and goodwill in respect of the acquisition of the Vuclip Group at the date when control was obtained by the Group were as follows:
In HK$ million Net assets acquired and goodwill (Unaudited)
Purchase consideration settled in cash 1,109 Fair value of equity interests in the Vuclip Group at the date when control was obtained by the Group 107 Consideration payable 70
Aggregate purchase consideration 1,286 Less: Estimated fair value of net assets acquired (337)
Goodwill on acquisition 949
The goodwill is attributable to the expected future profits generated from the expansion beyond Vuclip Group’s current markets by offering industry leading OTT services. With Vuclip Group’s proven technologies and established emerging market footprint as well as its dedicated and talented team, there are significant cost savings, time-to-market advantage and other synergies from this acquisition of the Vuclip Group.
None of the goodwill is expected to be deductible for tax purposes.
PCCW interim report 2015 41 NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (CONTINUED) For the six months ended June 30, 2015
18 BUSINESS COMBINATIONS (CONTINUED) a. Business combinations during the six months ended June 30, 2015 (continued) i. Acquisition of Vuclip, Inc. and its subsidiaries (together the “Vuclip Group”) (continued) (i) Details of net assets acquired and goodwill in respect of the acquisition of the Vuclip Group at the date when control was obtained by the Group were as follows: (continued) The assets and liabilities of the Vuclip Group at the date when control was obtained by the Group were as follows:
In HK$ million Estimated fair value (Unaudited)
Property, plant and equipment 11 Intangible assets 486 Trade receivables, prepayments, deposits and other current assets 76 Cash and cash equivalents 67 Short-term borrowings (23) Trade payables, accruals and other payables (51) Current income tax liabilities (6) Long-term borrowings (10) Deferred income tax liabilities (194)
356 Non-controlling interests (19)
Net assets acquired 337
In HK$ million Net cash outflow (Unaudited)
Purchase consideration settled in cash 1,109 Less: Cash and cash equivalents acquired (67)
Total net cash outflow for the six months ended June 30, 2015 1,042
(ii) Acquisition-related costs Acquisition-related costs of approximately HK$6 million were included in the consolidated income statement for the six months ended June 30, 2015.
(iii) Revenue and profit contribution The businesses of the acquired companies contributed revenue of approximately HK$38 million and loss attributable to equity holders of the Company of approximately HK$12 million to the Group for the period from the date when control was obtained by the Group to June 30, 2015. If the acquisition had occurred on January 1, 2015, the acquired companies’ revenue and loss attributable to equity holders of the Company for the period ended June 30, 2015 would have been approximately HK$106 million and approximately HK$37 million, respectively.
(iv) Gain on remeasuring the Group’s existing interests in the Vuclip Group The Group recognized a gain of HK$29 million as a result of remeasuring its available-for-sale investment in the Vuclip Group to fair value at the date when control was obtained by the Group. The gain is included in other gains, net in the Group’s consolidated income statement for the six months ended June 30, 2015.
42 PCCW interim report 2015 18 BUSINESS COMBINATIONS (CONTINUED) a. Business combinations during the six months ended June 30, 2015 (continued) ii. Acquisition of Keycom plc and its subsidiaries (“Keycom”) On April 7, 2015, the Group acquired approximately 92.9 per cent of the then issued ordinary share capital of Keycom plc and increased its interest to 100 per cent by the end of June 2015 for a total consideration of approximately £16.6 million (approximately HK$196 million). Keycom plc is a company engaged in the design, development and delivery of communications and multimedia services via high-speed connectivity in the United Kingdom. A payment of approximately £14.8 million (approximately HK$175 million) has been made by the Group as at June 30, 2015. The purpose of the acquisition is to expand the Group’s business to meet the growing demand for ubiquitous broadband connectivity through building resilient high availability wireless and wired network in the United Kingdom.
The Group is required to recognize the acquired companies’ identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria at their fair values at the acquisition date. As of the date of this unaudited condensed consolidated interim financial information, the purchase price allocation process is ongoing and has yet to be finalized. In the preparation of this unaudited condensed consolidated interim financial information, the Group has used the estimated fair values of the acquired assets and liabilities with the excess of the cost of acquisition over these estimated fair values being recorded as goodwill. This allocation of the purchase price to the acquired assets and liabilities is provisional and will be adjusted when the purchase price allocation is finalized. Had the purchase price allocation been completed, the fair values of the assets and liabilities acquired and the amount of goodwill to be recorded could be materially different from the amounts recognized. The values of assets and liabilities acquired and the resulting goodwill will be adjusted retrospectively upon the completion of the purchase price allocation.
(i) Details of net assets acquired and goodwill in respect of the acquisition of Keycom at the acquisition date were as follows:
In HK$ million Net assets acquired and goodwill (Unaudited)
Purchase consideration settled in cash 149 Consideration payable 21 Obligation assumed upon business combination 26
Aggregate purchase consideration 196 Less: Estimated fair value of net assets acquired (53)
Goodwill on acquisition 143
The goodwill is attributable to the expected future profits generated from communications services via high-speed connectivity. As a result of the acquisition, the Group is expected to grow and expand its broadband connectivity business in the United Kingdom via the strong, well-established business with a talented leadership team and employees of Keycom.
None of the goodwill is expected to be deductible for tax purposes.
PCCW interim report 2015 43 NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (CONTINUED) For the six months ended June 30, 2015
18 BUSINESS COMBINATIONS (CONTINUED) a. Business combinations during the six months ended June 30, 2015 (continued) ii. Acquisition of Keycom plc and its subsidiaries (“Keycom”) (continued) (i) Details of net assets acquired and goodwill in respect of the acquisition of Keycom at the acquisition date were as follows: (continued) The assets and liabilities of Keycom at the acquisition date were as follows:
In HK$ million Estimated fair value (Unaudited)
Property, plant and equipment 56 Intangible assets 12 Deferred income tax assets 8 Trade receivables, prepayments, deposits and other current assets 17 Cash and cash equivalents 1 Trade payables, accruals and other payables (30) Advances from customers (11)
Net assets acquired 53
In HK$ million Net cash outflow (Unaudited)
Purchase consideration settled in cash 149 Settlement of obligation assumed upon business combination 26
175 Less: Cash and cash equivalents acquired (1)
Total net cash outflow for the six months ended June 30, 2015 174
(ii) Acquisition-related costs Acquisition-related costs of approximately HK$5 million were included in the consolidated income statement for the six months ended June 30, 2015.
(iii) Revenue and profit contribution Keycom’s revenue and loss attributable to equity holders of the Company for the period from January 1, 2015 to the acquisition date were HK$24 million and HK$1 million, respectively. The business of Keycom has been integrated into the Group since the acquisition date. Accordingly, it is not practical to quantify the individual contribution of Keycom to the revenue and profit of the Group during the six months ended June 30, 2015 on any reasonable basis.
44 PCCW interim report 2015 18 BUSINESS COMBINATIONS (CONTINUED) a. Business combinations during the six months ended June 30, 2015 (continued) iii. Acquisition of Syntelligence Ltd On May 26, 2015, the Group completed the acquisition of the entire issued share capital of Syntelligence Ltd, a private company incorporated in the United Kingdom. The acquiree’s platform offers a complete solution for the delivery of cloud communications services to enterprises and service providers. The acquisition aims at expanding the Group’s offerings in unified communications for enterprises and service providers worldwide. The aggregate consideration was not material.
b. Business combinations during the six months ended June 30, 2014 i. Acquisition of CSL Holdings Limited (formerly known as CSL New World Mobility Limited) and its subsidiaries (together the “CSL Group”) On May 14, 2014, the Group completed the acquisition of the entire issued share capital of CSL Holdings Limited (formerly known as CSL New World Mobility Limited), a company incorporated in Bermuda, and its subsidiaries. The purpose of the acquisition is to bolster the Group’s telecommunications business and continue to meet the needs of Hong Kong public and local and international businesses with a wide range of telecommunications services through 4G, 3G and 2G networks, and the sales of mobile telecommunications products, to customers in Hong Kong. The estimated aggregate consideration was approximately US$2,585 million (approximately HK$20,054 million) which was recognized in the accounts for the acquisition.
The Group is required to recognize the acquired companies’ identifiable assets, liabilities and contingent liabilities that satisfy the recognition criteria at their fair values at the acquisition date. As of the date of this unaudited condensed consolidated interim financial information, the purchase price allocation process has been finalized. The initial accounting for the acquisition of the CSL Group was completed as at May 14, 2015. In completing the initial accounting, an addition of HK$37 million of goodwill has been recorded compared to the provisional amount previously disclosed as a result of additional information with respect to the finalization of the contingent consideration payable.
(i) Details of net assets acquired and goodwill in respect of the acquisition of the CSL Group at the acquisition date were as follows:
In HK$ million Net assets acquired and goodwill (Unaudited)
Aggregate purchase consideration 20,054 Less: Fair value of net assets acquired (6,402)
Goodwill on acquisition 13,652
The goodwill is attributable to the expected future profits generated from the telecommunications business strengthened by enhancement of mobile services income stream through increased economies of scale, enlargement of service capacity and improvement of indoor signal coverage and customer experience, strengthening of roaming business and opportunity to realize operational synergies.
None of the goodwill is expected to be deductible for tax purposes.
PCCW interim report 2015 45 NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL INFORMATION (CONTINUED) For the six months ended June 30, 2015
18 BUSINESS COMBINATIONS (CONTINUED) b. Business combinations during the six months ended June 30, 2014 (continued) i. Acquisition of CSL Holdings Limited (formerly known as CSL New World Mobility Limited) and its subsidiaries (together the “CSL Group”) (continued) (i) Details of net assets acquired and goodwill in respect of the acquisition of the CSL Group at the acquisition date were as follows: (continued) The assets and liabilities of the CSL Group at the acquisition date were as follows:
In HK$ million Fair value (Unaudited)
Property, plant and equipment 1,992 Intangible assets 6,391 Interests in a joint venture 14 Prepayments, deposits, trade receivables, net and other current and non-current assets 1,574 Defined benefit assets 26 Inventories 202 Cash and cash equivalents 1,186 Trade payables (287) Accruals, other payables and carrier licence fee liabilities (current and non-current) (2,745) Advances from customers (622) Deferred income (64) Current income tax liabilities (308) Deferred income tax liabilities (921)
6,438 Non-controlling interests (36)
Net assets acquired 6,402
In HK$ million Net cash outflow (Unaudited)
Purchase consideration: Settled in cash during 2014 19,943 Settled in cash during the six months ended June 30, 2015 77
20,020 Less: Cash and cash equivalents acquired (1,186)
18,834
(ii) Revenue and profit contribution CSL Group’s revenue and profit attributable to equity holders of the Company for the period from January 1, 2014 to the acquisition date were HK$2,942 million and HK$234 million, respectively. The business of the CSL Group has been integrated into the Group since the acquisition date. Accordingly, it is not practical to quantify the individual contribution of the CSL Group to the revenue and profit of the Group during the six months ended June 30, 2014 on any reasonable basis.
46 PCCW interim report 2015 GENERAL INFORMATION
DIRECTORS’ AND CHIEF EXECUTIVES’ INTERESTS AND SHORT POSITIONS IN SHARES, SHARE STAPLED UNITS, UNDERLYING SHARES, UNDERLYING SHARE STAPLED UNITS AND DEBENTURES OF THE COMPANY AND ITS ASSOCIATED CORPORATIONS As at June 30, 2015, the directors and chief executives of the Company and their respective close associates had the following interests and short positions in the shares, share stapled units jointly issued by the HKT Trust and HKT Limited (the “Share Stapled Units”), underlying shares, underlying Share Stapled Units and debentures of the Company and its associated corporations (within the meaning of Part XV of the Securities and Futures Ordinance (the “SFO”)) as recorded in the register required to be kept pursuant to Section 352 of the SFO or as otherwise notified to the Company and The Stock Exchange of Hong Kong Limited (the “Stock Exchange”) pursuant to the Model Code for Securities Transactions by Directors of Listed Issuers (the “Model Code”) set out in Appendix 10 to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”):
1. Interests in the Company The table below sets out the aggregate long positions in the shares of the Company held by the directors and chief executives of the Company:
Approximate percentage of the total number Number of ordinary shares held of shares of Personal Family Corporate Other the Company Name of Director/Chief Executive interests interests interests interests Total in issue
Li Tzar Kai, Richard – – 292,062,765 1,830,855,436 2,122,918,201 28.12% (Note 1(a)) (Note 1(b))
Srinivas Bangalore Gangaiah – – – 207,597 207,597 0.003% (Note 2)
Hui Hon Hing, Susanna 2,148,558 – – 1,806,996 3,955,554 0.05% (Note 2)
Lee Chi Hong, Robert 992,600 511 – – 993,111 0.01% (Note 3(a)) (Note 3(b))
Tse Sze Wing, Edmund – 360,474 – – 360,474 0.005% (Note 4)
Dr The Hon Sir David Li Kwok Po 1,075,073 – – – 1,075,073 0.01%
PCCW interim report 2015 47 GENERAL INFORMATION (CONTINUED)
DIRECTORS’ AND CHIEF EXECUTIVES’ INTERESTS AND SHORT POSITIONS IN SHARES, SHARE STAPLED UNITS, UNDERLYING SHARES, UNDERLYING SHARE STAPLED UNITS AND DEBENTURES OF THE COMPANY AND ITS ASSOCIATED CORPORATIONS (CONTINUED) 1. Interests in the Company (continued) Notes: 1. (a) Of these shares, Pacific Century Diversified Limited (“PCD”), a wholly-owned subsidiary of Chiltonlink Limited (“Chiltonlink”), held 255,782,141 shares and Eisner Investments Limited (“Eisner”) held 36,280,624 shares. Li Tzar Kai, Richard owned 100% of the issued share capital of Chiltonlink and Eisner.
(b) These interests represented:
(i) a deemed interest in 166,405,989 shares of the Company held by Pacific Century Group Holdings Limited (“PCGH”). Li Tzar Kai, Richard was the founder of certain trusts which held 100% interests in PCGH. Accordingly, Li Tzar Kai, Richard was deemed, under the SFO, to have an interest in the 166,405,989 shares of the Company held by PCGH;
(ii) a deemed interest in 1,664,446,447 shares of the Company held by Pacific Century Regional Developments Limited (“PCRD”), a company in which PCGH had, through itself and certain wholly-owned subsidiaries being Anglang Investments Limited, Pacific Century Group (Cayman Islands) Limited, Pacific Century International Limited and Borsington Limited, an aggregate of 86.56% interest. Li Tzar Kai, Richard was the founder of certain trusts which held 100% interests in PCGH. Accordingly, Li Tzar Kai, Richard was deemed, under the SFO, to have an interest in the 1,664,446,447 shares of the Company held by PCRD. Li Tzar Kai, Richard was also deemed to be interested in 1.04% of the issued share capital of PCRD through Hopestar Holdings Limited, a company wholly-owned by Li Tzar Kai, Richard; and
(iii) a deemed interest in 3,000 shares of the Company held by PineBridge Investments LLC (“PBI LLC”) in the capacity of investment manager. PBI LLC was an indirect subsidiary of Chiltonlink and Li Tzar Kai, Richard owned 100% of the issued share capital of Chiltonlink. Accordingly, Li Tzar Kai, Richard was deemed, under the SFO, to have an interest in the 3,000 shares of the Company held by PBI LLC in the capacity of investment manager.
2. These interests represented award(s) made to these directors which were subject to certain vesting conditions pursuant to an award scheme of the Company, namely the Purchase Scheme, the details of which are set out in the section below headed “Share Option Schemes and Share Award Schemes of the Company and its Subsidiaries”.
3. (a) These shares were held jointly by Lee Chi Hong, Robert and his spouse.
(b) These shares were held by the spouse of Lee Chi Hong, Robert.
4. These shares were held by the spouse of Tse Sze Wing, Edmund.
2. Interests in the Associated Corporations of the Company A. PCCW-HKT Capital No.4 Limited FWD Life Insurance Company (Bermuda) Limited (“FWD”) held US$9,000,000 of 4.25% guaranteed notes due 2016 issued by PCCW-HKT Capital No.4 Limited, an associated corporation of the Company. Li Tzar Kai, Richard indirectly owned an approximate 87.25% interest in FWD.
48 PCCW interim report 2015 DIRECTORS’ AND CHIEF EXECUTIVES’ INTERESTS AND SHORT POSITIONS IN SHARES, SHARE STAPLED UNITS, UNDERLYING SHARES, UNDERLYING SHARE STAPLED UNITS AND DEBENTURES OF THE COMPANY AND ITS ASSOCIATED CORPORATIONS (CONTINUED) 2. Interests in the Associated Corporations of the Company (continued) B. HKT Trust and HKT Limited The table below sets out the aggregate long positions in the Share Stapled Units held by the directors and chief executives of the Company:
Approximate percentage of the total Number of Share Stapled Units held number of Personal Family Corporate Other Share Stapled Name of Director/Chief Executive interests interests interests interests Total Units in issue
Li Tzar Kai, Richard – – 66,247,614 144,786,553 211,034,167 2.79% (Note 1(a)) (Note 1(b))
Hui Hon Hing, Susanna 1,238,744 – – 1,159,003 2,397,747 0.03% (Note 2)
Lee Chi Hong, Robert 50,924 25 – – 50,949 0.0007% (Note 3(a)) (Note 3(b))
Tse Sze Wing, Edmund – 246,028 – – 246,028 0.003% (Note 4)
Dr The Hon Sir David Li Kwok Po 169,302 – – – 169,302 0.002%
Each Share Stapled Unit confers an interest in:
(a) one voting ordinary share of HK$0.0005 in HKT Limited (“HKT”); and (b) one voting preference share of HK$0.0005 in HKT,
for the purposes of Part XV of the SFO, in addition to an interest in one unit in the HKT Trust.
Under the trust deed dated November 7, 2011 constituting the HKT Trust entered into between HKT Management Limited (in its capacity as the trustee-manager of the HKT Trust) and HKT as supplemented, amended or substituted from time to time and the amended and restated articles of association of HKT, the number of ordinary shares and preference shares of HKT in issue must be the same at all times and must also, in each case, be equal to the number of units of the HKT Trust in issue; and each of them is equal to the number of Share Stapled Units in issue.
PCCW interim report 2015 49 GENERAL INFORMATION (CONTINUED)
DIRECTORS’ AND CHIEF EXECUTIVES’ INTERESTS AND SHORT POSITIONS IN SHARES, SHARE STAPLED UNITS, UNDERLYING SHARES, UNDERLYING SHARE STAPLED UNITS AND DEBENTURES OF THE COMPANY AND ITS ASSOCIATED CORPORATIONS (CONTINUED) 2. Interests in the Associated Corporations of the Company (continued) B. HKT Trust and HKT Limited (continued) Notes: 1. (a) Of these Share Stapled Units, PCD held 20,227,614 Share Stapled Units and Eisner held 46,020,000 Share Stapled Units.
(b) These interests represented:
(i) a deemed interest in 13,159,619 Share Stapled Units held by PCGH. Li Tzar Kai, Richard was deemed, under the SFO, to have an interest in the 13,159,619 Share Stapled Units held by PCGH;
(ii) a deemed interest in 131,626,804 Share Stapled Units held by PCRD. Li Tzar Kai, Richard was deemed, under the SFO, to have an interest in the 131,626,804 Share Stapled Units held by PCRD; and
(iii) a deemed interest in 130 Share Stapled Units held by PBI LLC in the capacity of investment manager. Li Tzar Kai, Richard was deemed, under the SFO, to have an interest in the 130 Share Stapled Units held by PBI LLC in the capacity of investment manager.
2. These interests represented awards made to Hui Hon Hing, Susanna which were subject to certain vesting conditions pursuant to an award scheme of HKT, namely the HKT Share Stapled Units Purchase Scheme, the details of which are set out in the section below headed “Share Option Schemes and Share Award Schemes of the Company and its Subsidiaries”.
3. (a) These Share Stapled Units were held jointly by Lee Chi Hong, Robert and his spouse.
(b) These Share Stapled Units were held by the spouse of Lee Chi Hong, Robert.
4. These Share Stapled Units were held by the spouse of Tse Sze Wing, Edmund.
Save as disclosed in the foregoing, as at June 30, 2015, none of the directors or chief executives of the Company or their respective close associates had any interests or short positions in any shares, Share Stapled Units, underlying shares, underlying Share Stapled Units and debentures of the Company or any of its associated corporations (within the meaning of Part XV of the SFO) as recorded in the register required to be kept pursuant to Section 352 of the SFO or as otherwise notified to the Company and the Stock Exchange pursuant to the Model Code of the Listing Rules.
SHARE OPTION SCHEMES AND SHARE AWARD SCHEMES OF THE COMPANY AND ITS SUBSIDIARIES 1. The Company A. Share Option Scheme The Company currently operates a share option scheme which was adopted on May 8, 2014 following the approval by the shareholders of the Company at the annual general meeting of the Company held on the same day (the “2014 Scheme”). Subject to the terms and conditions stipulated in the 2014 Scheme, the board of directors of the Company (the “Board”) may, at its discretion, grant share options to any eligible participant to subscribe for shares of the Company.
No share options have been granted under the 2014 Scheme since its adoption and up to and including June 30, 2015.
50 PCCW interim report 2015 SHARE OPTION SCHEMES AND SHARE AWARD SCHEMES OF THE COMPANY AND ITS SUBSIDIARIES (CONTINUED) 1. The Company (continued) B. Share Award Schemes In 2002, the Company established two employee share incentive award schemes, namely the Purchase Scheme and the Subscription Scheme, under which employees of participating subsidiaries of the Company (excluding directors of the Company) may be selected to participate in such schemes. Subject to the relevant scheme rules, each scheme provides that following the making of an award to an employee, the relevant shares are held in trust for that employee and then shall vest over a period of time provided that the employee remains an employee of the applicable subsidiary of the Company at the relevant time and satisfies any other conditions specified at the time the award is made, notwithstanding that the relevant committee of the Board shall be at liberty to waive such condition. In May 2006, the rules of the Purchase Scheme were altered such that the directors of the Company were also eligible to participate in such scheme. The Purchase Scheme and the Subscription Scheme expired on November 15, 2012 however the shares which were previously awarded prior to the expiry date were not affected. New scheme rules in respect of the Purchase Scheme and the Subscription Scheme were adopted on November 15, 2012 so as to allow both schemes to continue to operate for a further 10 years and to accommodate the grant of the Share Stapled Units in addition or as an alternative to the shares of the Company, in the future.
(i) Purchase Scheme During the six months ended June 30, 2015, an aggregate of 3,265,515 shares of the Company and 13,163 Share Stapled Units were granted pursuant to the Purchase Scheme subject to certain vesting conditions, including awards in respect of 207,597 and 981,337 shares of the Company made respectively to BG Srinivas and Hui Hon Hing, Susanna (the directors of the Company). Additionally, 20,142 shares of the Company have lapsed and/or been forfeited and 5,531,602 shares of the Company have vested; and 8,917 Share Stapled Units have lapsed and/or been forfeited and 116,097 Share Stapled Units have vested during the period. As at June 30, 2015, 10,843,756 shares of the Company and 190,293 Share Stapled Units granted pursuant to the Purchase Scheme remained unvested.
(ii) Subscription Scheme During the six months ended June 30, 2015, an aggregate of 3,790,428 shares of the Company were granted pursuant to the Subscription Scheme subject to certain vesting conditions. Additionally, 129,139 shares of the Company have lapsed and/or been forfeited and 2,504,633 shares of the Company have vested during the period. As at June 30, 2015, 6,264,794 shares of the Company granted pursuant to the Subscription Scheme remained unvested. During the six months ended June 30, 2015, no Share Stapled Units have been granted to any employees of the Company and/or its subsidiaries under the Subscription Scheme. As at January 1, 2015 and June 30, 2015, no Share Stapled Units granted pursuant to the Subscription Scheme remained unvested.
Please also refer to the summary of movements in the shares of the Company and the Share Stapled Units held under the above schemes which are set out in note 12 to the unaudited condensed consolidated interim financial information on page 34.
PCCW interim report 2015 51 GENERAL INFORMATION (CONTINUED)
SHARE OPTION SCHEMES AND SHARE AWARD SCHEMES OF THE COMPANY AND ITS SUBSIDIARIES (CONTINUED) 2. HKT Trust and HKT Limited A. Share Stapled Units Option Scheme The HKT Trust and HKT conditionally adopted on November 7, 2011 a Share Stapled Units option scheme (the “HKT 2011-2021 Option Scheme”) which became effective upon listing of the Share Stapled Units. Under the HKT 2011-2021 Option Scheme, the board of directors of HKT Management Limited (the “Trustee-Manager Board”) and the board of directors of HKT (the “HKT Board”) may, at their discretion, grant Share Stapled Unit options to the eligible participants to subscribe for such number of Share Stapled Units as the Trustee-Manager Board and the HKT Board may determine at a subscription price on and subject to the terms and conditions stipulated therein.
No Share Stapled Unit options have been granted under the HKT 2011-2021 Option Scheme since its adoption and up to and including June 30, 2015.
B. Share Stapled Units Award Schemes On October 11, 2011, HKT conditionally adopted two award schemes pursuant to which awards of Share Stapled Units may be made, namely the HKT Share Stapled Units Purchase Scheme and the HKT Share Stapled Units Subscription Scheme (collectively the “HKT Share Stapled Units Award Schemes”). The HKT Share Stapled Units Award Schemes are on similar terms and were conditionally adopted by HKT and became effective upon listing of the Share Stapled Units as a potential means to incentivize and reward the eligible participants.
Subject to the rules of the HKT Share Stapled Units Award Schemes, each scheme provides that following the making of an award to an employee of HKT and its subsidiaries (collectively the “HKT Limited Group”), the relevant Share Stapled Units are held in trust for that employee and then shall vest over a period of time provided that the employee remains, at all times after the award date and on the relevant vesting date, an employee of the HKT Limited Group and satisfies any other conditions specified at the time the award is made, notwithstanding that the relevant committee of the HKT Board shall be at liberty to waive such condition.
During the six months ended June 30, 2015, an aggregate of 1,566,606 Share Stapled Units were granted subject to certain vesting conditions pursuant to the HKT Share Stapled Units Purchase Scheme, including an award in respect of 280,370 Share Stapled Units made to Hui Hon Hing, Susanna (a director of the Company). Additionally, 524,643 Share Stapled Units have lapsed and/or been forfeited and 5,707,168 Share Stapled Units have vested during the period. As at June 30, 2015, 8,336,126 Share Stapled Units granted pursuant to the HKT Share Stapled Units Purchase Scheme remained unvested. No Share Stapled Units have been granted under the HKT Share Stapled Units Subscription Scheme since the date of its adoption and up to and including June 30, 2015. Please also refer to the summary of movements in the Share Stapled Units held under the above schemes which are set out in note 12 to the unaudited condensed consolidated interim financial information on page 34.
52 PCCW interim report 2015 SHARE OPTION SCHEMES AND SHARE AWARD SCHEMES OF THE COMPANY AND ITS SUBSIDIARIES (CONTINUED) 3. Pacific Century Premium Developments Limited (“PCPD”) Share Option Schemes At PCPD’s annual general meeting held on May 6, 2015, the shareholders of PCPD approved the termination of its share option scheme which was adopted in May 2005 (the “2005 PCPD Scheme”) and the adoption of a new share option scheme (the “2015 PCPD Scheme”). The 2015 PCPD Scheme became effective on May 7, 2015 following its approval by the shareholders of the Company. After the termination of the 2005 PCPD Scheme, no further share options will be granted under such scheme, but in all other respects the provisions of such scheme will remain in full force and effect. There is no material difference between the terms of the 2005 PCPD Scheme and the 2015 PCPD Scheme.
PCPD currently operates the 2015 PCPD Scheme, under which the board of directors of PCPD may, at its discretion, grant share options to any eligible participant to subscribe for shares of PCPD subject to the terms and conditions stipulated therein.
No share options have been granted under the 2005 PCPD Scheme and the 2015 PCPD Scheme since their adoption and up to and including June 30, 2015.
Save as disclosed above, at no time during the period under review was the Company or any of its subsidiaries, holding companies or fellow subsidiaries a party to any arrangement that may enable the directors of the Company to acquire benefits by means of the acquisition of shares or Share Stapled Units in, or debentures of, the Company or any other body corporate and none of the directors or chief executives of the Company or their spouses or children under 18 years of age had any right to subscribe for equity or debt securities of the Company or any of its associated corporations or had exercised any such right during the period under review.
INTERESTS AND SHORT POSITIONS OF SUBSTANTIAL SHAREHOLDERS As at June 30, 2015, the following persons (other than any directors or chief executives of the Company) were substantial shareholders of the Company (as defined in the Listing Rules) and had interests or short positions in the shares and underlying shares of the Company as recorded in the register required to be kept pursuant to Section 336 of the SFO:
Approximate percentage of Number of the total number shares/underlying of shares of the Name of shareholder Note(s) shares held Company in issue
Interests PCRD 1,664,446,447 22.05% PCGH 1 1,830,852,436 24.25% Star Ocean Ultimate Limited 2 and 3 1,830,852,436 24.25% The Ocean Trust 2 1,830,852,436 24.25% The Starlite Trust 2 1,830,852,436 24.25% OS Holdings Limited 2 1,830,852,436 24.25% Ocean Star Management Limited 2 1,830,852,436 24.25% The Ocean Unit Trust 2 1,830,852,436 24.25% The Starlite Unit Trust 2 1,830,852,436 24.25% Star Ocean Ultimate Holdings Limited 3 1,830,852,436 24.25% Fung Jenny Wai Ling 4 1,830,852,436 24.25% Huang Lester Garson 4 1,830,852,436 24.25% 中國聯合網絡通信集團有限公司 (China United Network Communications Group Company Limited#) (“Unicom”) 5 1,397,772,149 18.52%
# For identification only
PCCW interim report 2015 53 GENERAL INFORMATION (CONTINUED)
INTERESTS AND SHORT POSITIONS OF SUBSTANTIAL SHAREHOLDERS (CONTINUED) Notes: 1. These interests represented (i) PCGH’s beneficial interests in 166,405,989 shares; and (ii) PCGH’s interests (through itself and its controlled corporations, being its wholly-owned subsidiaries, Borsington Limited, Pacific Century International Limited, Pacific Century Group (Cayman Islands) Limited and Anglang Investments Limited, which together controlled 86.56% of the issued share capital of PCRD) in 1,664,446,447 shares held by PCRD.
2. On April 18, 2004, Li Tzar Kai, Richard transferred the entire issued share capital of PCGH to Ocean Star Management Limited as trustee of The Ocean Unit Trust and The Starlite Unit Trust. The entire issued share capital of Ocean Star Management Limited was held by OS Holdings Limited. The Ocean Trust and The Starlite Trust held all units of The Ocean Unit Trust and The Starlite Unit Trust respectively. Star Ocean Ultimate Limited was the discretionary trustee of The Ocean Trust and The Starlite Trust.
3. On November 4, 2013, Star Ocean Ultimate Limited became a controlled corporation of Star Ocean Ultimate Holdings Limited.
4. Fung Jenny Wai Ling and Huang Lester Garson were deemed to be interested in such shares under the SFO as each of them controlled the exercise of one-third or more of the voting power at general meetings of each of Ocean Star Investment Management Limited, OS Holdings Limited and Star Ocean Ultimate Holdings Limited.
5. Unicom indirectly held these interests through China Unicom Group Corporation (BVI) Limited, a company wholly-owned by Unicom.
INTERESTS AND SHORT POSITIONS OF OTHER PERSONS REQUIRED TO BE DISCLOSED UNDER THE SFO As at June 30, 2015, the following person (not being a director or chief executive or substantial shareholder (as disclosed in the previous section headed “Interests and Short Positions of Substantial Shareholders”) of the Company) had interests or short positions in the shares and underlying shares of the Company as recorded in the register required to be kept pursuant to Section 336 of the SFO:
Approximate percentage of Number of the total number shares/underlying of shares of the Name shares held Company in issue
Interests Ocean Star Investment Management Limited Note 1,830,852,436 24.25%
Note: Ocean Star Investment Management Limited was deemed interested under the SFO in the shares of the Company by virtue of it being the investment manager of The Ocean Unit Trust and The Starlite Unit Trust which together held 100% of PCGH (see the notes to the previous section headed “Interests and Short Positions of Substantial Shareholders”).
Save as disclosed above in this section and the previous section headed “Interests and Short Positions of Substantial Shareholders”, the Company has not been notified of any other persons (other than any directors or chief executives of the Company) who had an interest or a short position in the shares, underlying shares or debentures of the Company as recorded in the register required to be kept pursuant to Section 336 of the SFO as at June 30, 2015.
54 PCCW interim report 2015 PURCHASE, SALE OR REDEMPTION OF LISTED SECURITIES During the six months ended June 30, 2015, neither the Company nor any of its subsidiaries purchased, sold or redeemed any of the listed securities of the Company.
AUDIT COMMITTEE The Company’s Audit Committee has reviewed the accounting policies adopted by the Company and its subsidiaries (the “Group”) and the unaudited condensed consolidated interim financial information of the Group for the six months ended June 30, 2015. Such condensed consolidated interim financial information has not been audited but has been reviewed by the Company’s independent auditor.
MODEL CODE SET OUT IN APPENDIX 10 TO THE LISTING RULES The Company has adopted its own code of conduct regarding securities transactions, namely the PCCW Code of Conduct for Securities Transactions (the “PCCW Code”), which applies to all directors and employees of the Company on terms no less exacting than the required standard indicated by the Model Code.
Having made specific inquiries of all the directors of the Company, confirmations have been received of compliance with the required standard set out in the Model Code and the PCCW Code during the accounting period covered by this interim report.
CORPORATE GOVERNANCE CODE The Company is committed to maintaining a high standard of corporate governance, the principles of which serve to uphold a high standard of ethics, transparency, responsibility and integrity in all aspects of business and to ensure that its affairs are conducted in accordance with applicable laws and regulations.
The Company has applied the principles and complied with all applicable code provisions of the Corporate Governance Code (the “CG Code”) as set out in Appendix 14 to the Listing Rules during the six months ended June 30, 2015, save and except for code provision F.1.2 as the appointments of company secretary during the period were discussed and approved at the physical executive committee meetings in accordance with the delegated board authority, of which the directors were briefed on the outcome, and therefore the requirement by code provision F.1.2 of the CG Code to approve these matters by physical board meetings has not been complied with. It is considered that the approval process is efficient and appropriate in the view of directors.
PCCW interim report 2015 55 INVESTOR RELATIONS
DIRECTORS LISTINGS The directors of the Company as at the date of the announcement of the The Company’s shares are listed on The Stock Exchange of Hong Kong 2015 Interim Results are: Limited and traded in the form of American Depositary Receipts (“ADRs”) on the OTC Markets Group Inc. in the United States. Each ADR represents Executive Directors: 10 ordinary shares of the Company. Certain guaranteed notes issued by Li Tzar Kai, Richard (Chairman) subsidiaries of the Company are listed on the Singapore Exchange Securities Srinivas Bangalore Gangaiah (aka BG Srinivas) (Group Managing Director) Trading Limited and the Taipei Exchange in Taiwan, China. Hui Hon Hing, Susanna (Group Chief Financial Officer) Lee Chi Hong, Robert Additional information and specific inquiries concerning the Company’s ADRs should be directed to the Company’s ADR Depositary at the address Non-Executive Directors: given on this page. Sir David Ford, KBE, LVO Tse Sze Wing, Edmund, GBS Other inquiries regarding the Company should be addressed to Investor Lu Yimin (Deputy Chairman) Relations at the address given on this page. Li Fushen Zhang Junan STOCK CODES Wei Zhe, David The Stock Exchange of Hong Kong Limited 0008 Reuters 0008.HK Independent Non-Executive Directors: Bloomberg 8 HK Dr The Hon Sir David Li Kwok Po, GBM, GBS, OBE, JP ADRs PCCWY Aman Mehta Frances Waikwun Wong REGISTRAR Bryce Wayne Lee Computershare Hong Kong Investor Services Limited Lars Eric Nils Rodert Shops 1712-1716, 17th Floor, Hopewell Centre David Christopher Chance 183 Queen’s Road East, Wan Chai, Hong Kong Telephone: +852 2862 8555 GROUP GENERAL COUNSEL AND COMPANY SECRETARY Fax: +852 2865 0990 Grace M.Y. Lee Email: [email protected]
REGISTERED OFFICE ADR DEPOSITARY 41st Floor, PCCW Tower Citibank, N.A. Taikoo Place, 979 King’s Road PCCW American Depositary Receipts Quarry Bay, Hong Kong Citibank Shareholder Services Telephone: +852 2888 2888 P.O. Box 43077 Fax: +852 2877 8877 Providence, Rhode Island 02940-3077, USA Telephone: +1 877 248 4237 (toll free within USA) INTERIM REPORT 2015 Telephone: +1 781 575 4555 This Interim Report 2015 in both English and Chinese is now Email: [email protected] available in printed form from the Company and the Company’s Share Website: www.citi.com/dr Registrar, and in accessible format on the websites of the Company (www.pccw.com/ir) and Hong Kong Exchanges and Clearing Limited SHARE INFORMATION (www.hkexnews.hk). Board lot: 1,000 shares Issued shares as at June 30, 2015: 7,549,189,256 shares Shareholders who: A) received the Interim Report 2015 using electronic means through the DIVIDEND website of the Company may request a printed copy, or Interim dividend per ordinary share B) received the Interim Report 2015 in either English or Chinese may for the six months ended June 30, 2015 7.96 HK cents request a printed copy of the other language version FINANCIAL CALENDAR by writing or sending email to the Company c/o the Company’s Share Announcement of 2015 Interim Results August 6, 2015
Registrar at: Closure of register of members August 26 – 27, 2015 Computershare Hong Kong Investor Services Limited (both days inclusive) Investor Communications Centre 17M Floor, Hopewell Centre Record date for 2015 interim dividend August 27, 2015 183 Queen’s Road East, Wan Chai, Hong Kong Telephone: +852 2862 8688 Fax: +852 2865 0990 Payment of 2015 interim dividend On or around October 7, 2015
Email: [email protected] Announcement of 2015 Annual Results February 2016 Shareholders who have chosen (or are deemed to have agreed) to receive the corporate communications of the Company (including but not limited to INVESTOR RELATIONS the Interim Report 2015) using electronic means through the Company’s Marco Wong website and who, for any reason, have difficulty in receiving or gaining PCCW Limited access to the Interim Report 2015 will promptly, upon request in writing or 41st Floor, PCCW Tower by email to the Company’s Share Registrar, be sent the Interim Report 2015 Taikoo Place, 979 King’s Road in printed form, free of charge. Quarry Bay, Hong Kong Telephone: +852 2514 5084 Shareholders may change their choice of language and/or means of receipt Email: [email protected] of the Company’s future corporate communications at any time, free of charge, by reasonable prior notice in writing or by email to the Company’s WEBSITE Share Registrar. www.pccw.com
56 PCCW interim report 2015 Forward-Looking Statements This interim report contains forward-looking statements. These forward-looking statements include, without limitation, statements relating to revenues and earnings. The words “believe”, “intend”, “expect”, “anticipate”, “project”, “estimate”, “predict”, “is confident”, “has confidence” and similar expressions are also intended to identify forward-looking statements. These forward-looking statements are not historical facts. Rather, the forward-looking statements are based on the current beliefs, assumptions, expectations, estimates and projections of the directors and management of PCCW about the business, industry and markets in which we operate. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and are difficult to predict. Consequently, actual results could differ materially from those expressed, implied or forecasted in the forward-looking statements. Factors that could cause actual results to differ materially from those reflected in the forward-looking statements include: • our ability to execute our business strategy to expand our businesses locally and overseas, including entering into business combinations, strategic investments and acquisitions and challenges in growing business organically; • our ability to develop our growth businesses in media and IT services after the spin-off of the telecommunications business into HKT; • possible negative effects of potentially new regulatory developments; • increased competition in the Hong Kong media market and the IT services market; • increased content costs, changes in customer viewing habits or changes in technology; • increased competition in the Hong Kong telecommunications market; • our ability to obtain additional capital; • our ability to implement our business plan as a consequence of our substantial debt; and • our exposure to interest rate risk. Reliance should not be placed on these forward-looking statements, which reflect the views of the directors and management of PCCW as at the date of this interim report only. We undertake no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after publication of this interim report. PCCW Limited (Incorporated in Hong Kong with limited liability)
41/F, PCCW Tower, Taikoo Place, 979 King’s Road, Quarry Bay, Hong Kong T: +852 2888 2888 F: +852 2877 8877 www.pccw.com
PCCW shares are listed on The Stock Exchange of Hong Kong Limited (SEHK: 0008) and traded in the form of American Depositary Receipts on the OTC Markets Group Inc. in the US (Ticker: PCCWY).
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